The tax rules affecting small businesses are changing, and 2026 brings several important opportunities for business owners to reduce their tax liability, improve their tax planning, and prepare for the upcoming filing season.
With the passage of the One Big Beautiful Bill Act (OBBBA), several significant tax provisions have been introduced, extended, or made permanent. These changes affect everything from business equipment purchases and vehicle deductions to contractor payments, business income, and year-end tax planning.
For small business owners, understanding these changes before the end of the year can make a meaningful difference when filing your 2026 tax return in 2027.
Whether you operate as a sole proprietor, single-member LLC, partnership, or S corporation, here are some of the most important 2026 tax changes you should understand.
1. 100% Bonus Depreciation Is Back Permanently
One of the biggest changes affecting small businesses in 2026 is the return of 100% bonus depreciation for qualifying business property.
Under the One Big Beautiful Bill Act, businesses can generally deduct 100% of the cost of eligible property in the year it is placed in service, rather than depreciating that property over several years.
This provision applies to qualifying property acquired after January 19, 2025.
Previously, bonus depreciation was scheduled to phase down, meaning businesses would receive a smaller first-year deduction for qualifying purchases. The new legislation restores 100% bonus depreciation and makes it permanent under current law.
What types of purchases may qualify?
Depending on the applicable requirements, qualifying purchases may include:
Machinery and manufacturing equipment
Computers and technology
Office furniture and equipment
Certain business vehicles
Certain qualified improvements and other depreciable property
For example, suppose a business purchases $40,000 of qualifying equipment and places it into service during 2026.
Under the 100% bonus depreciation rules, the business may be able to deduct the entire $40,000 in the year the equipment is placed in service rather than spreading the deduction across several years.
This can significantly reduce taxable business income.
What business owners should know
A large purchase does not automatically qualify for bonus depreciation. The property must meet the applicable eligibility requirements, and the acquisition and placed-in-service dates matter.
There are also situations where claiming the full deduction may not be the best tax strategy. A business owner expecting substantially higher income in future years may benefit from evaluating whether to accelerate deductions or preserve depreciation for later years.
The goal should not simply be to generate the largest deduction possible. It should be to make the best overall tax decision.
IRS resource: IRS Guidance on 100% Bonus Depreciation
2. Section 179 Deduction Limits Increased for 2026
Another important change involves the Section 179 deduction.
Section 179 allows qualifying businesses to elect to expense certain depreciable business property rather than recovering its cost through depreciation over multiple years.
For 2026, the maximum Section 179 deduction has increased to $2,560,000.
However, there is an important phaseout provision.
The deduction begins to phase out when total qualifying Section 179 property placed in service during the year exceeds $4,090,000.
For 2026, the maximum Section 179 deduction for qualifying sport utility vehicles is $32,000.
Section 179 vs. Bonus Depreciation
Although these deductions can accomplish similar goals, they are not identical.
Section 179 generally allows businesses to choose which qualifying assets to expense, but the deduction is subject to taxable business income limitations.
Bonus depreciation generally applies automatically unless the taxpayer elects out, and it can create or increase a business tax loss.
For example, a business purchasing $100,000 of qualifying equipment might be able to use Section 179, bonus depreciation, or a combination of depreciation methods, depending on the circumstances.
Choosing the right method can affect current taxable income, future deductions, and the overall tax position of the business.
Business owners making significant equipment purchases should discuss their options with a CPA before finalizing their tax strategy.
IRS resource: IRS Publication 946 – How to Depreciate Property
3. The 20% Qualified Business Income Deduction Is Now Permanent
The Qualified Business Income (QBI) deduction, also known as the Section 199A deduction, is one of the most valuable tax benefits available to eligible small business owners.
Previously, this deduction was scheduled to expire after 2025. The One Big Beautiful Bill Act made the deduction permanent.
The deduction generally allows eligible owners of pass-through businesses to deduct up to 20% of their qualified business income.
This can apply to:
Sole proprietorships
Single-member LLCs
Partnerships
S corporations
For example, assume an eligible business owner has $100,000 of qualified business income.
If the owner qualifies for the full deduction, they may receive a $20,000 QBI deduction, reducing the income subject to federal income tax.
It is important to understand that the QBI deduction does not reduce self-employment tax, Social Security tax, or Medicare tax.
Income limitations still matter
The deduction is subject to limitations based on taxable income, the type of business, W-2 wages, and qualified property.
Specified service trades or businesses may also face additional restrictions at higher income levels. These businesses can include certain consulting, accounting, legal, health, and financial services.
For 2026, the QBI taxable income threshold is:
$403,500 for married couples filing jointly.
$201,750 for most other filing statuses.
$201,775 for married individuals filing separately.
Additional limitations phase in above these thresholds.
For business owners with growing income, understanding how the QBI deduction interacts with compensation, business structure, and taxable income is particularly important.
IRS resource: IRS Publication 334 – Tax Guide for Small Business
4. The 1099 Reporting Threshold Increases to $2,000
Small business owners who hire independent contractors should pay attention to an important change involving Form 1099 reporting.
Beginning with payments made after December 31, 2025, the general reporting threshold for certain payments reported on Forms 1099 increases from $600 to $2,000.
This means that for qualifying payments made during 2026, businesses generally will not have to issue a Form 1099-NEC to a contractor unless payments reach at least $2,000, subject to applicable reporting rules and exceptions.
Previously, the threshold was $600.
What does this mean for small businesses?
Consider a business that hires several independent contractors throughout the year.
Under the previous reporting threshold, a contractor receiving $800 for services would generally have required a Form 1099-NEC.
Under the new threshold, that payment generally will not trigger the same reporting requirement for 2026.
However, there are two important things to remember:
First, this change does not mean contractor payments are no longer taxable income. Contractors are still responsible for reporting their business income, regardless of whether they receive a Form 1099.
Second, businesses should continue collecting W-9 forms and maintaining accurate records of payments made to contractors.
The new threshold does not eliminate the importance of proper bookkeeping or contractor classification.
IRS resource: IRS Publication 1099 – General Instructions for Certain Information Returns
5. Business Mileage Rates Changed During 2026
Vehicle expenses are another important area for small business owners.
The IRS standard mileage rate for business use of a vehicle changed during 2026 due to increased fuel costs.
The rates are:
January 1 through June 30, 2026: 72.5 cents per business mile.
July 1 through December 31, 2026: 76 cents per business mile.
This is an increase from the 70 cents per mile rate used during 2025.
For a business owner who drives 10,000 qualifying business miles during the year, the deduction could be substantial.
For example, if the business owner drove 5,000 qualifying miles during each half of 2026:
First half: 5,000 × $0.725 = $3,625
Second half: 5,000 × $0.76 = $3,800
Total mileage deduction: $7,425
This example assumes the business owner qualifies to use the standard mileage method and has properly documented the business miles.
Keep accurate mileage records
Business owners should maintain a mileage log that includes:
Date of each trip
Starting and ending locations
Business purpose of the trip
Total miles driven
Remember that commuting between your home and regular place of business is generally considered personal mileage, not deductible business mileage.
Business owners may also be able to deduct actual vehicle expenses instead of using the standard mileage rate, depending on the vehicle and applicable rules.
Choosing between actual expenses and standard mileage can have a meaningful impact on your tax return.
IRS resource: IRS Standard Mileage Rates
6. The Excess Business Loss Limitation Is Permanent
Another change that business owners with significant losses should understand is the permanent extension of the excess business loss limitation.
This rule generally applies to noncorporate taxpayers, including individuals who own sole proprietorships, partnerships, and S corporations.
The limitation restricts the amount of business losses an individual can use to offset other income during a tax year.
For 2026, the excess business loss threshold is:
$256,000 for most individual taxpayers.
$512,000 for married couples filing jointly.
If qualifying business losses exceed the applicable threshold, the excess generally cannot be deducted in the current year and is treated as a net operating loss carryforward.
This can be particularly important for business owners who operate multiple businesses, make significant investments, or experience substantial losses during a particular year.
Business owners should understand that generating a large business loss does not necessarily mean they can use the entire loss to offset wages, investment income, or other taxable income.
IRS resource: IRS Instructions for Form 461 – Limitation on Business Losses
7. The Social Security Wage Base Increased for Self-Employed Individuals
Self-employed individuals should also be aware of the 2026 Social Security wage base.
For 2026, the maximum amount of net earnings subject to the Social Security portion of self-employment tax increased to $184,500.
Self-employment tax generally consists of:
12.4% Social Security tax.
2.9% Medicare tax.
The Social Security portion applies only up to the annual wage base, while the Medicare portion generally continues to apply without that same income cap. Certain higher-income taxpayers may also owe Additional Medicare Tax.
For business owners operating as sole proprietors or partnerships, this is an important consideration when estimating quarterly tax payments.
S corporation owners should also understand how reasonable compensation and shareholder distributions affect payroll taxes.
Simply taking distributions instead of wages does not eliminate the requirement to pay reasonable compensation for services performed as an S corporation shareholder-employee.
Proper business structure and compensation planning can make a meaningful difference in overall tax liability.
IRS resource: IRS Publication 334 – Tax Guide for Small Business
What Should Small Business Owners Do Before December 31, 2026?
Knowing about tax law changes is only the first step. The real benefit comes from taking action before the end of the year.
Here are five things every small business owner should consider completing before December 31.
1. Review your year-to-date financial statements.
Look at your profit and loss statement and balance sheet. Understand how much revenue your business has generated, what expenses you have incurred, and how much profit you are expecting to report.
You cannot effectively plan your taxes without accurate financial information.
2. Evaluate upcoming equipment and vehicle purchases.
If you are considering purchasing equipment, technology, or a business vehicle, review the tax implications before making the purchase.
Bonus depreciation and Section 179 may provide significant deductions, but the timing and business purpose of the purchase matter.
3. Review your business structure.
If your business is growing, it may be worth evaluating whether your current tax classification still makes sense.
For example, some profitable LLC owners may benefit from evaluating an S corporation election. Others may find that the additional payroll, compliance, and administrative costs outweigh the potential tax savings.
This decision should be based on actual business profitability, reasonable compensation, and projected tax liability.
4. Verify contractor and payroll records.
Make sure you have accurate W-9 forms, contractor payment records, payroll information, and properly categorized expenses.
Waiting until January to organize everything creates unnecessary stress and increases the risk of filing errors.
5. Schedule a year-end tax planning meeting with your CPA.
A tax return tells you what happened last year. Tax planning helps you make decisions before the current year ends.
A proactive tax planning meeting can help identify deductions, estimate your tax liability, evaluate retirement contributions, and determine whether any additional action makes sense before December 31.
Work With a CPA Who Helps You Plan Ahead
Tax laws change, and small business owners need more than someone who simply prepares a tax return once a year.
At Knobbe & Associates, CPA, we work with individuals and small businesses to provide tax preparation, bookkeeping, tax planning, and business advisory services.
Our goal is to help business owners understand their numbers, make informed financial decisions, and avoid unnecessary surprises when tax season arrives.
Whether you operate an LLC, partnership, S corporation, or sole proprietorship, having accurate financial records and a proactive tax strategy can make a meaningful difference.
Don't wait until April 2027 to find out what you could have done differently in 2026.
Ready to get ahead of your taxes?
Contact Knobbe & Associates, CPA to schedule a consultation and discuss how we can help your business prepare for the end of 2026.
Visit www.knobbeassociatescpa.com to learn more about our bookkeeping, tax preparation, tax planning, and business advisory services.
Disclaimer: This article is for general educational purposes only and is not intended to provide individualized tax or legal advice. Tax treatment depends on each taxpayer's circumstances, business structure, income, and applicable IRS rules. Consult with a qualified tax professional before making tax-related decisions.
