Small Business Tax Planning

A cornerstone of small business tax planning in 2026 is the permanence of the Section 199A Qualified Business Income (QBI) deduction. This provision allows pass-through owners—including S-corporations, partnerships, and sole proprietorships—to exclude up to 20% of their business income from federal tax. For the 2026 tax year, the deduction begins to phase out at approximately $201,750 for single filers and $403,500 for joint filers. To support smaller or diversified ventures, the legislation guarantees a minimum QBI deduction of $400 for taxpayers with at least $1,000 in qualified business income, provided they demonstrate regular, continuous, and substantial involvement.

‍

Aggressive capital reinvestment remains supported by the permanent restoration of 100% bonus depreciation for qualified property placed in service during 2026. This enables the immediate federal expensing of the entire cost of machinery, equipment, and certain software. Complementing this, the Section 179 expensing limit for 2026 has increased to $2,560,000, with the phase-out threshold beginning when qualifying purchases exceed $4,090,000. Utilizing these mechanisms in tandem allows business owners to selectively apply expensing to manage their taxable income effectively to stay within optimal tax brackets or QBI phase-out ranges.

For high-net-worth residents in California, managing the State and Local Tax (SALT) deduction cap remains a critical priority. The OBBBA raised the SALT cap to approximately $40,400 for the 2026 tax year. However, high-income earners face a steep "tax cliff" where the deduction is reduced by 30 cents for every dollar that modified adjusted gross income (MAGI) exceeds $505,000. Once MAGI reaches $606,000, the deduction reverts to the original $10,000 floor. Proactive small business tax tips often focus on utilizing the California Pass-Through Entity (PTE) elective tax to convert these non-deductible personal state taxes into deductible federal business expenses.

‍

Senate Bill 132 (SB 132) has extended the California PTE election through 2030 and introduced significant administrative flexibility starting in the 2026 tax year. Under prior rules, failing to make the required June 15 prepayment—the greater of $1,000 or 50% of the prior year's tax—resulted in total disqualification from the program. Starting in 2026, a shortfall in this prepayment no longer invalidates the election; instead, the owner’s personal tax credit is reduced by 12.5% of the unpaid amount. This shift reduces the "all-or-nothing" risk of the election, allowing owners to maintain federal SALT relief even during mid-year liquidity crunches, though the cost of the credit reduction must be factored into the overall benefit analysis.

For business owners in the $1 million to $5 million wealth bracket, entity selection depends on balancing federal self-employment tax savings against California’s specific entity-level fees. An S-corporation structure often provides a self-employment tax arbitrage by splitting income between a reasonable salary (subject to FICA taxes) and shareholder distributions. However, this must be weighed against California’s 1.5% tax on S-corporation net income. Conversely, LLCs that do not elect S-status face gross receipts fees that scale with total revenue, reaching $6,000 for entities generating between $1 million and $4.99 million within the state.

‍

Effective tax planning for business owners must also address California’s non-conformity with federal depreciation rules. The state does not recognize 100% bonus depreciation and maintains a static Section 179 limit of only $25,000. This mismatch often results in "phantom income," where a business reporting a federal loss due to capital expensing faces a substantial state tax liability on profits that do not exist for federal purposes. To mitigate these state-level costs, owners should identify targeted credits such as the California Competes Tax Credit (CCTC), which has a baseline allocation of $180 million for the 2025-2026 fiscal year. Additionally, the New Employment Credit (NEC) offers up to $56,000 per qualified employee over five years for those hired in designated geographic areas.

Long-term wealth preservation is further enhanced by updates to the Section 1202 Qualified Small Business Stock (QSBS) regime. For stock issued after July 4, 2025, the law replaces the previous five-year "all-or-nothing" holding period with tiered exclusions: a 50% gain exclusion after three years, 75% after four years, and 100% after five years. The per-issuer cap has also been raised to $15 million. Because California does not conform to the Section 1202 exclusion, state-level strategies—such as the use of non-grantor trusts in tax-neutral jurisdictions—are often necessary to avoid a 13.3% state tax on the gain.

‍

Retirement planning in 2026 is influenced by the SECURE 2.0 Act, which introduces "super catch-up" contributions for owners aged 60 to 63, allowing an additional $11,250 to be deferred into a Solo 401(k). Notably, if prior-year wages exceeded $150,000, these catch-up contributions must be made on a Roth (after-tax) basis. For succession, the federal estate tax exemption has risen to $15 million per person for 2026. However, California residents must navigate high statutory probate fees calculated on the gross value of assets; for instance, a $2 million commercial property with a $1.5 million mortgage is still valued at $2 million for probate fee purposes. Utilizing a Revocable Living Trust remains the primary data-backed method for bypassing the California probate system and ensuring that business interests transfer seamlessly to the next generation.

‍

In summary, comprehensive business tax planning in 2026 requires the integration of permanent federal status provisions with nuanced state-level administrative shifts. Accurate modeling of income thresholds and capital expenditures is essential to ensure that deductions are captured rather than lost to phase-outs. Proactive analysis of these divergent schedules ensures that the business remains resilient through various fiscal cycles.