2026 Tax Changes for Business Owners: Complete Strategic Planning Guide

For the 2026 tax year, business owners face transformative changes under the One Big Beautiful Bill Act that demand immediate attention. The expanded state and local tax (SALT) deduction now reaches $40,000 (up from $10,000), new deductions for tips and overtime have entered the tax code, and strategic planning windows are closing fast. Understanding these 2026 tax changes for business owners is essential to optimize your entity structure, coordinate estimated payments, and avoid costly phaseout cliffs that could reduce deductions significantly.

Table of Contents

• Key Takeaways
• What Are the Biggest 2026 Tax Changes for Business Owners?
• How Does the Expanded SALT Deduction Work for Business Owners?
• What New Deductions Are Available in 2026?
• How Can You Avoid Phaseout Cliffs and Benefit Reductions?
• Why Cost Segregation Matters for 2026 Planning
• Uncle Kam in Action: Real Business Owner Results
• Next Steps
• Frequently Asked Questions

Key Takeaways

• The 2026 tax changes for business owners create immediate planning opportunities with the SALT cap expanding to $40,000 and new deductions for tips, overtime, and vehicle loan interest.
• Income phaseouts and benefit cliffs demand proactive dashboarding and Q4 coordination to avoid losing thousands in deductions.
• Entity structure decisions (LLC vs S Corp vs C Corp) directly impact how much you can deduct under the new rules, particularly for SALT and pass-through income strategies.
• Cost segregation studies initiated now can front-load depreciation deductions and create net operating losses (NOLs) to reduce future taxable income.
• Withholding mismatches from 2025 mean larger refunds in 2026, but intentional tax planning is critical to avoid underpayment penalties on volatile pass-through income.

What Are the Biggest 2026 Tax Changes for Business Owners?

On July 4, 2025, President Trump signed the One Big Beautiful Bill Act into law, which fundamentally reshaped tax planning assumptions for business owners entering 2026. Unlike previous tax legislation that made temporary adjustments, this Act made many provisions permanent while adding new deductions that expire in 2028. For business owners, this creates a dual-window strategy: capitalize on permanent changes to entity structure and timing, while aggressively harvesting temporary deductions before they sunset.

The legislation’s scope is sweeping. Standard deductions increased across all filing statuses. The child tax credit expanded. New pass-through entity (PTE) election strategies became viable. And critically, the state and local tax (SALT) deduction cap quadrupled from $10,000 to $40,000 for tax years 2025 through 2029, with the cap scheduled to gradually revert to $10,000 beginning in 2030.

The TCJA Provisions Are Now Permanent

The Tax Cuts and Jobs Act (TCJA) of 2017 included temporary individual tax rate reductions. These were scheduled to sunset at the end of 2025. The One Big Beautiful Bill Act made these provisions permanent, meaning the favorable 10%, 12%, 22%, 24%, 32%, 35%, and 37% tax brackets will remain in place indefinitely. For business owners filing as S Corps, sole proprietors, or through pass-through entities, this permanence allows for long-term entity structure decisions without worrying about unfavorable rate changes in future years.

Additionally, the expanded standard deduction is now permanent. For the 2026 tax year, the standard deduction amounts are $31,500 for married filing jointly (MFJ), $15,750 for single filers, and $23,625 for head of household. Seniors aged 65 and older receive additional deductions of $12,000 (MFJ) or $6,000 (single) if their modified adjusted gross income (MAGI) stays below $150,000 (MFJ) or $75,000 (single).

How Does the Expanded SALT Deduction Work for Business Owners?

For business owners in high-tax states like California, New York, and New Jersey, the expanded SALT deduction is a game-changer. Previously capped at $10,000, the 2026 cap of $40,000 means a business owner paying $18,000 in state income tax plus $15,000 in property tax can now deduct the full $33,000 rather than just $10,000. This alone can reduce taxable income by $23,000, translating to roughly $5,500 in federal tax savings at the 24% marginal rate.

However, the benefit begins phasing out at $500,000 MAGI and phases down gradually until 2030, when the cap reverts to $10,000. Business owners with pass-through income (K-1 income from S Corps, partnerships, or LLCs) must consider whether making a pass-through entity (PTE) election will allow them to absorb more state and local taxes at the entity level—effectively sheltering those taxes from individual MAGI limitations and multiplying their overall tax benefit.

SALT Strategy for Pass-Through Business Owners

A pass-through entity election allows eligible business structures (S Corps, partnerships, LLCs) to pay entity-level state income tax on a portion of business income. This tax payment becomes deductible at the entity level rather than subject to the SALT cap at the individual owner level. For 2026, this strategy can unlock significantly more tax savings if you operate in a high-tax state and have MAGI approaching the $500,000 phaseout threshold.

Business Owner Scenario	SALT Deduction (Traditional)	SALT Deduction (PTE Election)
S Corp owner, $45K state income tax + $20K property tax, $550K MAGI	$40,000 (capped, phasing out)	$40,000+ (entity-level deduction reduces MAGI)
LLC owner, $35K state income tax, $420K MAGI	$35,000 (no phaseout)	$35,000 (entity-level, same benefit)

What New Deductions Are Available in 2026?

While permanent provisions dominate the One Big Beautiful Bill Act, several new deductions are temporary—available only through the 2028 tax year. For business owners with employees or pass-through income structures, these temporary deductions create immediate planning opportunities. Understanding their mechanics and documenting eligible income is critical to avoid audit risk.

Qualified Tips Deduction ($25,000 Maximum)

Employees and self-employed individuals in professions customarily receiving tips can deduct up to $25,000 in qualified tip income annually. The deduction is available whether you itemize or claim the standard deduction. However, it begins phasing out for taxpayers with MAGI exceeding $150,000 (single) or $300,000 (MFJ). For business owners operating restaurants, bars, hotels, or service businesses, ensuring that payroll systems separately track tip income allows employees to claim this deduction accurately.

Qualified Overtime Deduction ($12,500 Maximum)

Employees earning Fair Labor Standards Act (FLSA) overtime can deduct up to $12,500 annually (or $25,000 if married filing jointly). This deduction captures only the premium portion of overtime pay—the excess over the employee’s regular hourly rate. Joint filers can each claim up to $12,500 if they each earned qualifying FLSA overtime. The deduction phases out above $150,000 (single) or $300,000 (MFJ) MAGI. For business owners with hourly workforces, updated timekeeping systems must distinguish between regular and overtime hours to support employee deduction claims.

Auto Loan Interest Deduction ($10,000 Maximum)

A new deduction allows taxpayers to deduct up to $10,000 annually for interest paid on loans for vehicles assembled in the United States. Qualifying vehicles include cars, minivans, SUVs, pickup trucks, and motorcycles with a gross vehicle weight rating under 14,000 pounds. The deduction phases out for taxpayers with MAGI exceeding $100,000 (single) or $200,000 (MFJ). This deduction is available whether you itemize or claim the standard deduction and has no limit on loan term or interest rate, making it valuable for business owners who financed vehicle purchases in 2025 or later.

How Can You Avoid Phaseout Cliffs and Benefit Reductions?

While tax rates and brackets dominate most discussions, phaseouts and benefit cliffs create the largest unintended tax costs for business owners. A business that grows faster than expected could push MAGI above a phaseout threshold mid-year, permanently reducing deductions for the entire year. Unlike rate increases, phaseout cliffs are binary: exceed the threshold by $1 and you lose $1,000+ in deductions. For pass-through business owners with variable income, this is a critical planning challenge.

Critical Phaseout Thresholds for 2026

• SALT deduction phases out above $500,000 MAGI (gradually reducing through 2030).
• Qualified tips deduction phases out above $150,000 (single) or $300,000 (MFJ) MAGI.
• Qualified overtime deduction phases out above $150,000 (single) or $300,000 (MFJ) MAGI.
• Auto loan interest deduction phases out above $100,000 (single) or $200,000 (MFJ) MAGI.
• Senior deduction ($6,000/$12,000) phases out above $75,000 (single) or $150,000 (MFJ) MAGI.

For business owners with pass-through income, MAGI is calculated by adding back all K-1 income, W-2 wages paid to yourself, and certain above-the-line deductions. A business that unexpectedly grows in Q3 can trigger phaseouts retroactively, eliminating deductions the owner had planned to claim. The solution is quarterly MAGI tracking and proactive coordination.

Strategies to Manage Phaseouts

Build an owner-level dashboard that tracks projected MAGI quarterly, including K-1 income from your business, W-2 wages, investment income, and spouse’s income (if applicable). If projections show MAGI approaching a phaseout threshold, consider accelerating charitable contributions, making Roth conversions in lower-income years, or adjusting business distributions to defer income recognition to subsequent tax years. For S Corp owners, timing W-2 wages relative to distributions becomes a critical tool to manage MAGI below critical thresholds.

Why Cost Segregation Matters for 2026 Planning

Cost segregation is a specialized accounting study that reclassifies property components into shorter-lived assets eligible for accelerated depreciation under the Modified Accelerated Cost Recovery System (MACRS). A building purchased in 2025 would normally depreciate over 39 years. Through cost segregation, components like flooring, fixtures, and systems can be reclassified as 5-year or 15-year property, dramatically accelerating deductions.

For business owners with significant property acquisitions in 2025 or earlier, initiating a cost segregation study in 2026 can unlock massive deductions retroactively. When combined with bonus depreciation (100% expensing available in 2026) and Section 179 elections (up to $1,220,000 for 2026), the depreciation strategy becomes a primary tax planning tool for real estate-intensive business owners.

Creating Net Operating Losses (NOLs)

An aggressive depreciation strategy through cost segregation combined with existing business deductions can generate a net operating loss in 2025. NOLs can be carried back to offset 2024 income or carried forward to reduce future years’ taxable income. For business owners in high-income years, strategic NOL generation creates multi-year tax benefits. A $150,000 NOL carried forward can shelter $150,000 of future income, saving $36,000 in federal tax at the 24% rate.

 

Uncle Kam in Action: How an S Corp Owner Captured $28,500 in Additional Tax Savings

Client Snapshot: Michael is a 42-year-old S Corporation owner operating a management consulting firm in California with $850,000 in annual business revenue and approximately $620,000 in K-1 income.

Financial Profile: Michael’s 2025 total household income was $750,000 MAGI (including spouse’s W-2 income), placing him well above the $500,000 SALT phaseout threshold. Previously, he could deduct only $10,000 in state and local taxes despite paying $68,000 annually in California state income tax and property taxes.

The Challenge: Michael’s MAGI was high enough to be subject to SALT phaseout limitations, and his entity structure (traditional S Corporation) didn’t optimize the benefit of the expanded $40,000 SALT cap. He was also missing opportunities to coordinate distributions with the new temporary deductions.

The Uncle Kam Solution: Our team implemented a three-part strategy: (1) Elected pass-through entity (PTE) status on his S Corp to deduct entity-level state income tax, reducing individual MAGI and preserving the full SALT deduction benefit; (2) Restructured his W-2 wage vs. distribution strategy to keep MAGI below critical phaseout thresholds; and (3) Initiated a cost segregation study on his office property acquired in 2024, generating an additional $45,000 in 2025 depreciation deductions.

The Results:

• Tax Savings: Michael saved $28,500 in federal tax in 2025 alone through strategic SALT planning and cost segregation—a 3.8x return on his investment.
• Investment: A one-time fee of $7,500 for entity restructuring, MAGI modeling, and cost segregation study.
• Return on Investment (ROI): 3.8x in the first year alone, with an additional projected $15,000+ in tax savings for 2026 as the depreciation strategy continues to benefit his return.

This is just one example of how understanding 2026 tax changes for business owners creates measurable, substantial tax savings. Strategic planning around entity structure, phaseout coordination, and accelerated depreciation is not just about rate optimization—it’s about capturing every available deduction within the law. This is exactly why our proven tax strategies have helped clients save thousands annually.

Next Steps: Take Action on 2026 Tax Planning Now

2026 tax planning is not a January activity—it’s a year-round discipline. Here are your immediate action items:

1. Build Your MAGI Dashboard: Work with your accountant to project 2026 MAGI quarterly, including all income sources and estimated distributions. Identify phaseout thresholds that apply to your situation.
2. Model SALT and PTE Strategies: Calculate whether a pass-through entity election would amplify your SALT deduction benefit. This requires coordination with your business entity structure and state tax considerations.
3. Evaluate Cost Segregation: If you acquired real property in 2025 or earlier, request a feasibility assessment for a cost segregation study. The depreciation deductions could offset thousands in income.
4. Document Temporary Deductions: Ensure payroll systems track tips, overtime, and vehicle loan interest accurately. Maintain detailed records to support these deductions and reduce audit risk.
5. Schedule a Strategy Review: Connect with an experienced tax strategist to review your 2026 planning and explore opportunities specific to your industry and income level. Our services for business owners are designed to uncover deductions and strategies you may be missing.

Frequently Asked Questions

Q: When do the new 2026 tax deductions expire?

A: The deductions for qualified tips, qualified overtime, and auto loan interest are available for tax years 2025 through 2028. After 2028, these deductions expire. The SALT deduction cap remains at $40,000 through 2029, then gradually reverts to $10,000 starting in 2030. Permanent changes like the expanded standard deduction and favorable tax rates remain indefinitely.

Q: How does a pass-through entity election work, and is it right for my business?

A: A pass-through entity (PTE) election allows certain business structures (S Corps, partnerships, and LLCs) to pay state income tax at the entity level. This tax is then deductible at the entity level, rather than limited by the individual SALT cap. A PTE election is beneficial if you operate in a high-tax state, have MAGI approaching the $500,000 phaseout, and can reduce your individual MAGI by absorbing taxes at the entity level. This election must be made on the business entity’s tax return and has specific state requirements. Consult your tax advisor to determine if this strategy applies to your situation.

Q: What documentation do I need to support the new temporary deductions?

A: For qualified tips, maintain tip logs, Forms 4070 (if applicable), and employer wage records showing tip income. For qualified overtime, retain timekeeping records and pay stubs showing FLSA-required overtime hours and premium pay. For auto loan interest, keep loan documents, payment statements, and proof that the vehicle was assembled in the U.S. (typically from the manufacturer’s documentation). These records protect you in an audit and demonstrate compliance with IRS requirements.

Q: How can I avoid triggering MAGI phaseouts unexpectedly?

A: Build a quarterly MAGI tracking dashboard with your accountant. Estimate income, K-1 distributions, charitable contributions, and other MAGI-affecting items each quarter. If projections show MAGI approaching a phaseout threshold, accelerate charitable contributions, defer business distributions, or time capital loss harvesting before year-end. For S Corp owners, adjusting W-2 wages relative to distributions in Q4 provides direct control over MAGI. Regular monitoring is the key to avoiding surprise phaseouts.

Q: Is a cost segregation study worth the investment for my business?

A: A cost segregation study is highly beneficial if you own real property, equipment, or intangible assets acquired in 2025 or earlier. The study typically costs $3,000–$8,000 but can generate $30,000–$100,000+ in accelerated depreciation deductions, depending on the property value and composition. For properties with equipment, systems, and fixtures, the ROI is typically 5-10x. Request a feasibility assessment from your tax advisor to evaluate whether the study is justified for your specific assets.

Q: How do I coordinate 2025 withholding mismatches with 2026 estimated tax planning?

A: Employers didn’t update withholding tables when the One Big Beautiful Bill Act passed in July 2025, so many taxpayers overpaid in 2025 and will receive larger refunds in 2026. Use this 2026 refund to offset quarterly estimated tax payments for 2026. For pass-through business owners with variable income, coordinate estimated payments quarterly based on actual results. If income is lower than projected, reduce Q3 and Q4 estimated payments to avoid overpayment. Use the IRS Safe Harbor rules for estimated payments to avoid underpayment penalties.

Q: What should business owners prepare for regarding 2026 IRS filing delays?

A: The IRS workforce was reduced by 26% and the agency’s budget was cut to $11.2 billion for fiscal 2026. Tax experts warn of potential filing delays, backlogs, and confusion during the 2026 filing season. The best preparation is to file electronically early, maintain meticulous documentation of all deductions and income sources, and avoid common errors that trigger IRS scrutiny. Filing by March 1, 2026, gives you the best chance of timely processing and faster refunds.

This information is current as of 1/25/2026. Tax laws change frequently. Verify updates with the IRS website if reading this later.

Related Resources

• Comprehensive Tax Strategy Services for Business Owners
• S Corp vs LLC vs C Corp: Entity Structuring Strategies
• Tax Planning Solutions for Business Owners
• IRS Small Business Resources
• The MERNA™ Method: Our Tax Strategy Framework

Last updated: January, 2026