The year-end tax planning checklist for business owners

Why December 31 matters

Most small businesses use the cash method, which means income counts when it’s received and expenses count when they’re paid. That makes the calendar a planning tool: a payment made on December 30 lands in 2026, and one made on January 2 lands in 2027.

Year-end moves only help if you know roughly where the year will land. Start in October or November with year-to-date books, a projection through December and last year’s return. Without that, it’s easy to spend money on a deduction you didn’t need or miss one that would have kept you under a threshold.

2026 is also the first full year under many One Big Beautiful Bill Act provisions, including new charitable deduction limits, so habits from prior years may not fit.

Retirement contributions: what must happen by December 31

Retirement plans are usually the largest and cleanest deduction available to an owner. For 2026, the 401(k) deferral limit is $24,500 (plus $8,000 at age 50 and over, or $11,250 for those turning 60 through 63), and the overall defined contribution limit is $72,000. The deadlines differ by plan type:

• Existing Solo 401(k), self-employed owner: elect your 2026 deferrals by December 31; the money can go in by the return due date, including extensions
• Existing 401(k), S corp owner: deferrals come out of W-2 pay, so they need to run through payroll by the last payroll of the year
• New Solo 401(k), sole proprietor with no employees: can still be adopted for 2026 up to the April 15, 2027 filing deadline (not counting extensions)
• SEP-IRA: can be opened and funded up to the extended due date of the 2026 return — no year-end action required
• SIMPLE IRA: a new plan generally had to be set up by October 1, 2026 to count for this year, so it’s a 2027 decision now
• Employer profit-sharing contributions to a 401(k): generally due by the return due date, including extensions

Timing income and expenses

If you expect to be in a lower bracket next year, deferring income and accelerating expenses can help. If next year looks bigger, the opposite may be better. The goal is to smooth taxable income across years, not simply minimize this year.

Watch the thresholds. For 2026, the qualified business income deduction starts to be limited for many service businesses — including physicians, attorneys and consultants — once taxable income passes $201,750 ($403,500 married filing jointly), and it’s fully phased out $75,000 later ($150,000 joint). A well-timed expense can keep you on the right side of that line.

• Paying January’s bills in December is generally fine for cash-method businesses; prepaying years of expenses in advance generally isn’t deductible all at once
• Delaying invoices is legitimate, but income you could have collected and chose not to — a check sitting in your drawer — is still generally taxable when received
• Pay state estimated income tax in December only if you itemize and are under the SALT cap: for 2026, $40,400 ($20,200 married filing separately), reduced when modified AGI exceeds $505,000 but not below $10,000
• If your state has a pass-through entity tax election, confirm the payment and election deadlines, which are set by each state

Equipment purchases and depreciation

Under the One Big Beautiful Bill Act, 100% bonus depreciation is permanent for qualified property acquired after January 19, 2025. Section 179 expensing is also available; for tax years beginning in 2026, the limit is $2,560,000, reduced dollar for dollar once qualifying purchases exceed $4,090,000, with a $32,000 cap for certain SUVs.

The key rule for year-end is that property has to be placed in service — delivered, set up and ready for use — by December 31. Ordering it, or paying a deposit, isn’t enough.

A worked example: an S corp owner in the 32% bracket buys $60,000 of equipment in December and fully expenses it. Taxable business income falls by $60,000, but because the QBI deduction is 20% of business income, it shrinks by about $12,000. The net drop in taxable income is roughly $48,000, saving about $15,400 of federal income tax.

• Only buy what the business needs; a deduction returns a fraction of the cash spent
• Section 179 can’t create a loss, while bonus depreciation can
• Many states don’t follow federal bonus depreciation, so the state deduction may be spread over years
• Selling expensed equipment later generally triggers ordinary income recapture
• Vehicles have their own limits and business-use requirements; keep a mileage log

Fourth-quarter estimates

The final 2026 estimated payment is due January 15, 2027. Before then, compare what you’ve paid with the safe harbor: 110% of your 2025 total tax if your 2025 AGI was over $150,000, otherwise 100%, or 90% of your 2026 tax.

If you’re short, withholding is your best tool. Federal withholding is treated as paid evenly through the year, so extra withholding on a December W-2 paycheck — easy for an S corp owner to arrange through payroll — can cover underpayments from earlier quarters. A late estimated payment can’t.

If you’d like the state deduction for a fourth-quarter state estimate on your 2026 return, it generally has to be paid by December 31, not January.

S corp payroll true-up

For S corp owners, the last payroll of the year is where several decisions converge. Settle them before the year’s final run rather than after.

• Reasonable compensation: check that your 2026 salary is defensible for the work you do, and adjust with a year-end bonus if it’s light
• Health insurance: premiums the S corp pays for a more-than-2% shareholder should be included in that shareholder’s W-2 wages, which is what supports the owner’s self-employed health insurance deduction
• Retirement: 401(k) deferrals must come out of W-2 pay, and employer contributions are based on W-2 wages only, not K-1 profit
• Reimbursements: submit home office, mileage and other expenses under the company’s accountable plan before year-end
• Withholding: use a year-end bonus to catch up federal and state withholding if estimates are short
• 1099s: collect W-9s now. For payments made in 2026, the Form 1099-NEC threshold rose to $2,000 (from $600), and 2026 forms are due February 1, 2027 because January 31 falls on a Sunday

Charitable giving under the 2026 rules

The rules changed for 2026, and they reward planning. If you itemize, only charitable contributions above 0.5% of AGI are deductible. For someone with $400,000 of AGI, the first $2,000 of giving produces no deduction.

Taxpayers in the top bracket face a second limit: itemized deductions are reduced by 5.4% of the lesser of total itemized deductions or taxable income above $640,600 ($768,700 married filing jointly). If you don’t itemize, you can now deduct up to $1,000 ($2,000 married filing jointly) of cash gifts to qualifying charities.

C corporations have a new floor too: for tax years beginning after 2025, only contributions above 1% of taxable income are deductible, up to the existing 10% ceiling.

• Bunching several years of gifts into one year can clear the 0.5% floor and make itemizing worthwhile
• Giving appreciated stock held more than a year generally avoids capital gains tax and is deductible at fair market value, subject to AGI limits
• Owners 70½ or older can make qualified charitable distributions from an IRA — up to $111,000 for 2026 — which aren’t subject to the floor because they’re excluded from income rather than deducted
• Get a written acknowledgment for any single gift of $250 or more before you file

Harvesting investment losses

Selling investments at a loss before December 31 can offset realized gains, including gains from a business asset or a concentrated stock position. If losses exceed gains, up to $3,000 a year ($1,500 married filing separately) can offset ordinary income, and the rest carries forward indefinitely.

The wash sale rule disallows the loss if you buy substantially identical securities within 30 days before or after the sale, including in an IRA. Switching to a similar but not identical fund generally avoids the problem. For most publicly traded stocks and funds, the sale counts in the year of the trade date, so a sale on December 31 is a 2026 transaction.

What can still be done after December 31

Not everything has a year-end deadline. These can still count for 2026 if done in time:

• Fourth-quarter federal estimate — January 15, 2027
• Traditional and Roth IRA and HSA contributions for 2026 — April 15, 2027
• New Solo 401(k) for a sole proprietor with no employees — April 15, 2027, without extensions
• SEP-IRA setup and funding, and 401(k) employer contributions — the return due date, including extensions (as late as October 15, 2027 for an extended individual return)
• Self-employed owners’ elective deferrals already elected by December 31 — deposited by the return due date, including extensions

Frequently asked questions