Year-End Tax Planning for Small Business Owners

Most small business owners think about taxes in March. The ones who pay less do their planning in the months before December 31. The difference is not how much they earn; it is when they act.

Tax returns are a record of what happened. Tax planning is a tool for changing what will happen. Once a calendar year closes, your options shrink significantly. You cannot go back and restructure compensation, time a large equipment purchase, or fund a retirement plan for a period that has already ended.

The strategies that move the needle most for business owners all have deadlines, and most of those deadlines fall on December 31.

Key Details

• The QBI deduction is now permanent under the One Big Beautiful Bill Act (OBBBA), with wider phase-out ranges starting in 2026. More pass-through owners now qualify.
• 100% bonus depreciation is restored permanently for equipment purchased and placed in service after January 19, 2025. The Section 179 limit also doubled.
• Retirement plan contributions are deductible, depending on several factors, including the type of retirement plan (Traditional IRA, Roth IRA, Employer plan such as 401(k), Solo 401(k), SEP IRA, Simple IRA), income and filing status.
• Cash-basis businesses can shift taxable income between years by timing invoices and prepaying deductible expenses before year-end.
• Entity Structure affects both self-employment tax and QBI. Self-employed businesses that have grown significantly may benefit from an S corporation election, but the change needs to be planned and in place on or before the 15th day of the third month of the taxable year for which the election is to take effect.

Why Planning Before Year-End Makes the Difference

The urgency is higher now than it has been in several years. The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, made permanent several provisions that were previously temporary, expanded key deductions, and introduced new thresholds taking effect in 2026.

Business owners who plan around these changes will benefit. Those who do not will leave money behind that they did not have to leave.

The strategies below apply to real decisions that small and mid-size business owners face every year. If any of them describe your situation, it is worth a conversation with a business tax accountant before the year closes.

The Pass-Through Deduction Is Permanent and Wider in 2026

For owners of sole proprietorships, partnerships, S corporations, and LLCs taxed as pass-throughs, the qualified business income (QBI) deduction has been one of the most valuable provisions in the tax code since 2018. It allows eligible business owners to deduct up to 20% of qualified business income, effectively reducing the rate they pay on that income.

Before the OBBBA, this deduction was scheduled to expire after 2025. That expiration has been eliminated. The QBI deduction under Internal Revenue Code Section 199A is now permanent.

According to IRS Publication 334 (Tax Guide for Small Business), the permanence of this deduction makes multi-year income management around the QBI thresholds more predictable than it has ever been.

More Owners Qualify at Higher Income Levels

Starting in 2026, the OBBBA expands the income threshold and phase-in range.

This means more business owners at higher income levels will qualify for at least a partial deduction.

The law also introduces a minimum deduction of $400 for any taxpayer with at least $1,000 in qualified business income, providing a floor for smaller businesses that would otherwise miss out.

Consultants, Doctors, and Financial Advisors: You Still Have Limits

Owners in specified service trades or businesses (SSTBs), such as consulting, financial services, and healthcare, still face income limits above which the deduction phases out. But those limits are wider beginning in 2026, giving some higher-earning SSTB owners access to partial deductions they previously could not claim.

Bonus Depreciation and Section 179: Full Expensing Is Back

If your business is buying equipment, upgrading technology, or investing in improvements to commercial space, how you handle depreciation matters more right now than it has in years.

100% Bonus Depreciation Restored

Before the OBBBA, bonus depreciation was on a phase-down schedule that would have dropped it to 40% in 2025 and eliminated it entirely by 2027. The OBBBA reversed that trajectory permanently.

For qualifying property acquired and placed in service after January 19, 2025, 100% bonus depreciation is now available and is no longer set to expire. A business that buys $200,000 of qualifying equipment in 2025 can deduct the entire amount in the current year rather than spreading it over a depreciation schedule.

The Section 179 Cap Doubled to $2.5 Million

Section 179, which allows immediate expensing of qualifying equipment and software, was also expanded significantly. The OBBBA raised the maximum deduction from $1,250,000 to $2,500,000 for tax years beginning in 2025, with a phase-out threshold raised to $4,000,000.

For 2026, these amounts increase further to $2,560,000 and $4,090,000 respectively, with annual inflation adjustments going forward.

How to Combine Both Provisions

Businesses can use both provisions together. Section 179 is typically applied first, with bonus depreciation applied to any remaining qualifying costs.

The practical difference between the two matters for certain business types. Section 179 covers a broader range of property, including improvements to nonresidential buildings such as roofing, HVAC systems, and security systems. Bonus depreciation does not apply to those improvement categories.

Section 179 also cannot create a net operating loss, while bonus depreciation can. For businesses that are profitable and buying a mix of equipment and property improvements, the right approach often involves both.

Retirement Plan Contributions: Deduction Limits for Business Owners

Funding a retirement plan is one of the few tax strategies that simultaneously reduces your current-year tax bill and builds long-term assets. For business owners, the contribution limits are significantly higher than what employees at other companies typically have access to.

Three plan types are most commonly used by small business owners:

SEP-IRA: Easiest to Set Up, Fund It by Your Filing Deadline

A Simplified Employee Pension IRA is the easiest to set up and maintain. Employers can contribute up to 25% of each eligible employee’s compensation, with a maximum of $70,000 per participant for 2025 and $72,000 for 2026, according to IRS Publication 560.

A significant advantage: a SEP-IRA can be established and funded as late as the due date of your tax return, including extensions. A business owner on extension could fund a 2025 SEP-IRA as late as October 2026.

Solo 401(k): Highest Limits, but Must Be Open by December 31

A solo 401(k), also called a one-participant 401(k), is available to self-employed individuals with no employees other than a spouse.

It allows contributions in two categories: as an employee (up to $23,500 in 2025, or $31,000 with catch-up contributions for those 50 or older) and as the employer (up to 25% of compensation). Combined, the 2025 limit reaches $70,000, or $77,500 with catch-up.

The critical deadline: a solo 401(k) must be established before December 31 of the tax year, even though contributions themselves can be made later. IRS guidance on one-participant 401(k) plans covers the contribution rules in detail.

SIMPLE IRA: Best Fit if You Have a Few Employees

A SIMPLE IRA works well for businesses with fewer than 100 employees that want to offer a retirement benefit without the administrative complexity of a full 401(k).

Employees can contribute up to $16,500 in 2025 and $17,000 in 2026, with catch-up contributions available for those 50 and older. Employers must either match contributions dollar-for-dollar up to 3% of compensation or make a flat 2% non-elective contribution for all eligible employees.

Picking Between Them

For most profitable small business owners, the decision between a SEP-IRA and a solo 401(k) comes down to flexibility versus maximum contribution potential. A CPA familiar with your income profile can model both options to show which produces a better outcome given your specific numbers.

The one move that costs nothing but time is waiting until after December 31 to look at this.

Moving Income and Expenses Across the Calendar Year

Cash-basis taxpayers, meaning most small businesses that report income when received and expenses when paid, have a legal and straightforward tool available every year: timing.

Moving income forward or pushing expenses back, within the same calendar year, can shift meaningful amounts of taxable income between years without changing the underlying economics of the business.

Accelerating Deductible Expenses

Prepaying deductible costs before December 31 accelerates the deduction into the current year. This works for expenses with a benefit period of 12 months or less, including insurance premiums, subscriptions, rent deposits, and certain service contracts.

Buying supplies your business will use in the next few months before year-end is another option. If 2025 has been a high-income year and 2026 is expected to be lower, pulling deductions into 2025 reduces the tax owed on income taxed at higher rates now.

Deferring Income to the Following Year

A cash-basis business that has not yet invoiced for work completed near year-end can choose whether to send those invoices in December or January.

A December invoice collected in late December increases 2025 income. A January invoice defers that income to 2026. Neither approach is problematic from a tax compliance standpoint, as long as the business consistently follows its accounting method.

Accrual-basis businesses have fewer options for income deferral, but may be able to identify uncollectable receivables to write off or delay year-end bonus accruals in ways that affect taxable income.

Strategies for managing cash flow and forecasting year-end positions are covered in WhippleWood’s guide to budgeting and cash flow forecasting.

Has Your Business Outgrown Its Legal Structure?

The legal structure of your business affects how income is taxed, what deductions are available, and how much you pay in self-employment taxes. For many business owners, the structure they set up at the beginning still makes sense. For others, growth has outpaced the original setup.

When an S Corp Election Saves More Than It Costs

The most common conversation involves sole proprietors and single-member LLCs who are paying self-employment tax on all of their net income.

The potential savings depend on how much of a reasonable salary the IRS would require for the owner’s role, and on the additional administrative costs of running an S corp, including payroll filing and a separate corporate tax return. Done correctly, the net savings often justify those costs.

The Pass-Through Deduction Changes the S Corp Math

The permanent QBI deduction changes this calculation at the margins. Because S corp salary reduces QBI (which the owner can then deduct at 20%), and because distributions from an S corp do not generate self-employment taxes, optimizing the split between salary and distributions requires modeling both the employment tax savings and the QBI effect together.

This is a case where generic rules of thumb are less useful than a review of your actual numbers with a business tax accountant who understands both variables.

Working with WhippleWood

WhippleWood works with business owners across Colorado, from professional services firms and franchise operators to healthcare practices and manufacturing companies, on tax planning that goes beyond return preparation.

If your business is growing, if the OBBBA changes affect your situation, or if you have not revisited your entity structure or retirement plan in several years, it is worth a conversation before year-end rather than after.

Tax planning is one of the clearest answers to the question every business owner asks: how do we keep more of what we earn? It works best when it starts early.

Contact WhippleWood to schedule a tax planning review.