2026 Mid-Year Business Client Tax Planning Letter

July 22, 2026

Dear Sir or Madam,

The less hectic summer season is a good time to consider steps to cut your 2026 tax bill. This year, midyear planning is especially important because the One Big Beautiful Bill, (The 2025 Act), enacted in July 2025, made several business tax law changes that generally begin taking effect in 2025 and 2026. Here are some planning strategies to consider for your business.

Establish a Tax-favored Retirement Plan

If your business doesn’t already have a retirement plan, now might be the time to take the plunge.

If you are self-employed and set up a SEP (Self Employment Pension) plan for yourself, you can contribute up to 20% of your net self-employment income, with a maximum contribution of $72,000 for 2026.
If you are employed by your own corporation, up to 25% of your salary can be contributed, with a maximum contribution of $72,000 for 2026.

Other small business retirement plan options include:

The 401(k) plan, which can be set up for just one person
The defined benefit pension plan
The SIMPLE-IRA, which can be a good choice if your business income is modest or if you want a plan that is easier to administer than a traditional 401(k) plan.

Under the SECURE 2.0 Act, SIMPLE-IRA and SIMPLE 401(k) plans can be more attractive than they used to be because of higher allowable contribution and catch-up limits available for certain small employers.

For most SIMPLE plans, the 2026 salary deferral limit is $17,000, with an additional $3,850 catch-up contribution allowed for employees who are age 50 or older.
For qualifying small employers, generally those with 25 or fewer employees who received at least $5,000 of compensation in the preceding calendar year, the higher limits apply automatically. For these employers, the 2026 salary deferral limit is $18,000, and the catch-up contribution limit is $4,000.

The higher SECURE 2.0 contribution limits can make SIMPLE plans more appealing for small business owners and key employees. Because the increased limits allow more tax-deferred retirement savings, some employers may find that a SIMPLE-IRA remains a practical choice longer before moving to a more complicated retirement plan.

It Might Not Be Too Late to Establish a Plan and Make a Deductible Contribution for Last Year. The general deadline for setting up a tax-favored retirement plan, such as a SEP or 401(k) plan, is the extended due date of the tax return for the year you want to make the initial deductible contribution. For instance, if your business is a sole proprietorship, you have until 10/15/26 to establish a plan and make the initial deductible contribution if you extended your 2025 individual tax return.

To make a SIMPLE-IRA contribution for the 2026 tax year, you generally must have set up the plan by October 1, 2026.

Evaluate Your Options. Contact us for more information on small business retirement plan alternatives, including whether your business qualifies for the higher SIMPLE-plan contribution limits. Also be aware that if your business has employees, you may have to cover them too.

Take Advantage of Generous Depreciation Tax Breaks

Current federal income tax rules allow generous first-year depreciation write-offs for eligible assets that are placed in service in your business’s current tax year. The new law makes these rules even more favorable in several important ways.

Section 179 Deductions. The 2025 Act significantly increased Section 179 expense limits. For qualifying property placed in service in tax years beginning in 2026, the maximum Section 179 deduction was increased to $2.56 million. Most types of personal property used for business, as well as off-the-shelf software costs are eligible for Section 179 deductions. These deductions can also be claimed for certain real property expenditures called Qualified Improvement Property, or QIP.

Note: QIP includes any improvement to an interior portion of a nonresidential building that is placed in service after the date the building is first placed in service, except for expenditures attributable to the enlargement of the building, any elevator or escalator, or the building’s internal structural framework.

Section 179 deductions can also be claimed for qualified expenditures for roofs, HVAC equipment, fire protection and alarm systems, and security systems for nonresidential real property. To qualify, these items must be placed in service after the nonresidential building has been placed in service.

In addition, Section 179 deductions can be claimed for personal property used predominately to furnish lodging or in connection with the furnishing of lodging. Examples include furniture, kitchen appliances, lawn mowers, and other equipment used in the living quarters of a lodging facility or in connection with a lodging facility, such as a hotel, motel, apartment house, dormitory, or other facility where sleeping accommodations are provided and rented out.

Warning: Section 179 deductions can’t cause an overall business tax loss, and deductions are phased out if too much qualifying property is placed in service in the tax year. The Section 179 deduction limitation rules can get really tricky if you own an interest in a pass-through business entity, such as a partnership, an LLC treated as a partnership for tax purposes, or an S corporation. Contact us for details on how the limitations work and whether they will affect you or your business entity.

Full Bonus Depreciation. The new law makes 100% bonus depreciation permanent for eligible business property acquired after 1/19/25. That means your business may be able to write off the entire cost of qualified new or used property placed in service in 2026.

This creates a major planning opportunity. If you are considering acquiring equipment, machinery, furniture, computers, or other eligible depreciable property, placing the property in service before year end may produce a substantial 2026 deduction. However, you should generally evaluate Section 179 deductions and bonus depreciation together to determine the best overall tax result.

In some cases, claiming the biggest possible first-year write-off is not the best move. For example, large depreciation deductions can reduce qualified business income (QBI) and may reduce your allowable QBI deduction. They can also reduce current-year income that might otherwise be taxed at a lower rate than income in a later year. Contact us before making major asset purchases so we can help you determine the most tax-efficient approach.

Depreciation Deductions for Heavy SUVs, Pickups, and Vans. The federal income tax depreciation rules favor new and used heavy vehicles used over 50% for business. That’s because heavy SUVs, pickups, and vans are treated for tax purposes as transportation equipment. That means they may qualify for Section 179 deductions and 100% bonus depreciation. However, this favorable depreciation treatment is only available when the SUV, pickup, or van has a manufacturer’s Gross Vehicle Weight Rating, or GVWR, above 6,000 pounds. The GVWR of a vehicle can be verified by looking at the manufacturer’s label, which is usually found on the inside edge of the driver’s side door where the door hinges meet the frame.

If you are considering buying an eligible vehicle, doing so and placing it in service before the end of this tax year could deliver a significant write-off on this year’s return.

Depreciation Deductions for Cars, Light SUVs, Light Trucks, and Light Vans. For so-called passenger autos, meaning cars and light SUVs, trucks, and vans that are used over 50% for business, the so-called luxury auto depreciation limitations apply. For passenger autos that are acquired and placed in service in 2026, the luxury auto depreciation limits are as follows:

$20,300 for Year 1 if first-year bonus depreciation is claimed, or $12,300 if bonus depreciation is not claimed.
$19,800 for Year 2.
$11,900 for Year 3.
$7,160 for Year 4 and thereafter until the vehicle is fully depreciated.

Bottom Line: To take advantage of favorable federal income tax depreciation rules, consider making eligible asset acquisitions between now and year end. Contact us for full details on applicable depreciation rules and the planning opportunities they might open up.

Time Business Income and Deductions for Tax Savings

If you conduct your business using a pass-through entity, such as a sole proprietorship, S corporation, LLC, or partnership, your share of the business’s income and deductions are generally passed through to you and taxed at your personal rates.

The strategy of deferring income into next year, while accelerating deductible expenditures into this year, makes sense if you expect to be in the same or lower tax bracket next year. Deferring income and accelerating deductions will, at a minimum, postpone part of your tax bill from 2026 until 2027.

On the other hand, if you expect to be in a higher tax bracket in 2027, take the opposite approach. Accelerate income into this year, if possible, and postpone deductible expenditures until 2027. One way to postpone deductible expenditures may be to elect out of bonus depreciation or to claim less than the maximum available Section 179 deduction. That way, more income may be taxed at this year’s lower rate instead of next year’s higher rate.

The right strategy depends on your expected tax rate, cash flow, eligibility for the QBI deduction, and whether the excess business loss limitation affects you. Contact us for details on how to implement additional business income and deduction timing strategies.

Deducting Research and Development Expenditures

Under the 2025 Act, taxpayers can fully expense domestic R&E expenditures in the year paid. Costs that qualify for full deduction include labor costs, materials and supplies, cost recovery allowances on property used in research activities, patent costs, certain overhead costs, and travel costs related to research activities.

A small business election allows taxpayers to retroactively apply the new deduction rules by filing an amended return, which could result in a tax refund for deducting any remaining capitalized balance. But the window to file these amended return refund claims for 2022, 2023, and 2024 tax years closes on July 6, 2026. Please reach out to us if you think you may have research and development expenses you continue to capitalize from these prior years.

There are opportunities to take an R&E credit, rather than a deduction, just one or the other; no double dipping. We can help you determine the best course of action for your business.

Prepare for Higher Information Reporting Thresholds

The 2025 Act increases the general Form 1099 information reporting threshold for certain business payments from $600 to $2,000 for payments made after 12/31/25.

This change may reduce the number of information returns some businesses must file. However, businesses should continue collecting Forms W-9 from vendors and independent contractors and maintain complete payment records. The higher threshold does not eliminate the need for proper documentation, and some payments may still be reportable under other rules.

The new law also reinstates the Form 1099-K threshold for third-party settlement organizations. The threshold reverts to more than $20,000 in payments and more than 200 transactions. This change is effective retroactively to 2021, as if it had been included in the American Rescue Plan Act.

Even with these higher thresholds, income remains taxable whether or not a Form 1099 is received. If your business receives payments through third-party networks or pays independent contractors, we can help you review your reporting obligations.

Evaluate Paid Family and Medical Leave Credit Opportunities

The employer credit for paid family and medical leave is permanent for tax years beginning after 12/31/25.

The new law also allows an employer to choose the type of credit for a paid family and medical leave insurance policy. This may make the credit more useful for some employers that provide benefits through insurance arrangements rather than directly paying leave wages.

If your business currently offers paid family and medical leave, or is considering doing so, contact us to evaluate whether the credit may be available and whether changes to your written leave policies or insurance arrangements could improve the tax result.

Employing Family Members

Employing family members can be a useful strategy to reduce overall tax liability. If the family member is a bona fide employee, the taxpayer can deduct the wages and benefits, including medical benefits, paid to the employee on Schedule C or F as a business expense, thus reducing the proprietor’s self-employment tax liability.

In addition, wages paid to your child under the age of 18 by a parent’s sole proprietorship or certain partnerships are not subject to federal employment taxes, will be deductible at your marginal tax rate, are taxable at the child’s marginal tax rate, and can be offset by up to $16,100, which is your child’s maximum standard deduction for 2026.

However, your family member must be a bona fide employee (a legitimate, authorized worker who performs genuine, necessary business tasks), and basic business practices should be followed. That means keeping time reports, filing payroll returns, issuing Forms W-2 when required, and basing pay on the actual work performed.

Conclusion

This letter only covers a few tax planning moves that could potentially benefit your business. We sincerely appreciate your patronage and, as always, we strive to provide you with professional and efficient service. If you have any questions regarding this letter or our services, please do not hesitate to call.

Sincerely,

C. S. Smith & Associates, CPA’s