Year-End Tax Planning for Business Owners: What to Do Before December 31, 2026

Most end of year tax strategies for a small business come down to one question: which tax year does a dollar of income or expense belong to? For a calendar-year business the answer is locked on December 31, long before anyone prepares the return. This checklist puts the 2026 dates in order, then explains the rule behind each item, with figures from Rev. Proc. 2025-32 and current IRS publications. No 2027 inflation amounts appear here, because the IRS has not published them yet.

The 2026 year-end tax planning checklist, by date

The full list of federal filing dates by entity type, with calendar downloads, is on the business tax calendar.

Timing income and deductions: what your accounting method allows

The method on your return sets the limits. Under the cash method, income counts in the year you actually or constructively receive it, and deductions count in the year you pay them (Publication 538; Treas. Reg. 1.461-1(a)(1)). Constructive receipt closes the obvious loophole: an amount credited to your account, set apart for you or otherwise made available without substantial limits is income that year even if you never touch it (Treas. Reg. 1.451-2(a)). Under an accrual method, income is generally reported when earned, and an expense is deducted when all events have fixed the liability, the amount can be figured with reasonable accuracy and economic performance has occurred (Treas. Reg. 1.461-1(a)(2)).

Not every business gets to choose. A C corporation, or a partnership with a C corporation as a partner, cannot use the cash method unless its average annual gross receipts for the three prior tax years are $32,000,000 or less for tax years beginning in 2026 (IRC 448; Rev. Proc. 2025-32). Switching methods is not a December project either: once you have filed a return, a change generally needs IRS approval, requested on Form 3115 (Publication 538).

Prepaid expenses and the 12-month rule

An expense paid in advance is normally deductible only in the year it applies to. The exception is the 12-month rule in Treas. Reg. 1.263(a)-4(f): a payment does not have to be capitalized if the right or benefit it buys does not extend beyond the earlier of 12 months after the benefit begins or the end of the tax year after the year of payment. Two illustrations with round numbers, for a calendar-year business that pays on December 20, 2026:

• A 12-month insurance policy covering January 1 to December 31, 2027 ends by the close of 2027, so the premium can be deducted for 2026.
• A 12-month policy starting February 1, 2027 runs into January 2028, past the end of 2027, so the whole premium is capitalized. The regulation's own example reaches the same result for a policy paid in December that starts the next February.

Three limits apply. A business that has not been using the rule needs IRS approval to start, because it is an accounting method change (Publication 538). An accrual-method business must also meet the economic performance rules before deducting (Treas. Reg. 1.263(a)-4(f)(6)). And the rule does not reach payments that create financial interests, amortizable section 197 intangibles or rights of indefinite duration (Treas. Reg. 1.263(a)-4(f)(3), (4)).

Year-end bonuses under the accrual method

An accrual-method employer can deduct a 2026 bonus on its 2026 return when the liability is fixed by December 31 and the employee receives the money by the 15th day of the third month after year end, March 15, 2027 for a calendar year. Paid after that, the bonus is presumed to be deferred compensation and is deducted when the employee includes it in income (Treas. Reg. 1.404(b)-1T). Owners are the exception. When the payee uses the cash method and is related to the business, the deduction waits until the payee includes the amount in income (IRC 267(a)(2)). In an S corporation every shareholder counts as related for this rule, however small the stake (IRC 267(e)). In a C corporation it reaches, among others, an individual who owns more than 50% of the stock by value (IRC 267(b)(2)).

Equipment: in service by December 31

Section 179 expensing and bonus depreciation both belong to the year property is placed in service, which the IRS defines as ready and available for a specific use (Publication 946). The purchase date, the invoice date and the payment date do not decide the year; readiness does. For tax years beginning in 2026 the section 179 limit is $2,560,000 (Rev. Proc. 2025-32), and 100% bonus depreciation applies to qualified property acquired after January 19, 2025 (IRC 168(k)). The limits, the business income cap and how the two methods compare are in the section 179 deduction guide.

Owner pay: settle it before the last payroll of the year

For an S corporation owner who works in the business, December is the last chance to line up 2026 wages with the distributions already taken. The IRS says an S corporation must pay a shareholder-employee reasonable compensation before non-wage distributions, and it can reclassify distributions as wages (IRS S corporation compensation guidance). A 2026 salary has to run through a 2026 payroll, with withholding, deposits, the fourth-quarter Form 941 and a 2026 Form W-2, so there is no fixing it in January. Four items belong in that final run.

• Salary or bonus. A bonus is a supplemental wage. If income tax was withheld from the owner's regular wages in 2026 or 2025, the employer can withhold a flat 22% on it, and 37% on supplemental wages above $1 million for the year (Publication 15 (2026)). Illustration with round numbers: a $30,000 December bonus carries $6,600 of flat-rate income tax withholding and $2,295 of employee Social Security and Medicare, and the company owes another $2,295, assuming the owner's 2026 wages stay under the $184,500 Social Security wage base.
• Health insurance. Premiums the corporation pays for a shareholder who owns more than 2% are reported as wages in box 1 of the W-2 and are subject to income tax withholding, but not to Social Security, Medicare or FUTA tax when paid under a plan that covers all employees or a class of them. The shareholder's above-the-line deduction for those premiums requires coverage established by the S corporation (IRS S corporation compensation guidance).
• 401(k) deferrals. A deferral election can reach only pay that is not yet available to the employee, and only pay that becomes available after the 401(k) arrangement is adopted (Treas. Reg. 1.401(k)-1(a)(3)(iii)). For an S corporation owner the base is W-2 pay, not distributions (IRS retirement plan FAQ). The 2026 deferral limit is $24,500, plus a catch-up of $8,000 at age 50 or older, or $11,250 for those who reach 60 to 63 in 2026 (Notice 2025-67).
• Extra withholding. Income tax withheld from wages is treated as paid in equal parts on the four installment dates unless you elect actual dates (IRC 6654(g)), so a larger December withholding can cover an earlier shortfall in estimated payments.

Every business with employees has one more 2026 change to prepare for. P.L. 119-21 created deductions for qualified tips and qualified overtime, and the 2026 Form W-2 reports them: box 12 code TT for qualified overtime compensation, code TP for cash tips reported to the employer, and a new box 14b for the Treasury Tipped Occupation Code (2026 Form W-2 instructions). Payroll records need that detail before the year closes, because Forms W-2 for 2026 are due to employees and the SSA by February 1, 2027. For contractors, 2026 nonemployee compensation of $2,000 or more goes on Form 1099-NEC (Instructions for Forms 1099-MISC and 1099-NEC, Rev. December 2026). BEG's Managed Payroll, from $25 per employee per month, runs owner and employee payroll through year-end W-2s.

Retirement plans: what has to exist by December 31

Set-up deadlines differ by plan type, and the difference decides whether a plan still counts for 2026 once the year is over.

The statute and the IRS publication do not read the same way on qualified plans. IRC 401(b)(2) lets an employer adopt a stock bonus, pension, profit-sharing or annuity plan after the year closes but before the return due date, including extensions, and elect to treat it as adopted on the last day of the year, while Publication 560 (2025) tells readers the plan must be adopted by the last day of the year to deduct contributions. The safe course for a plan meant to cover 2026 is to sign the documents in 2026. A new plan may also qualify for the small employer pension plan startup cost credit, which covers 100% of qualified startup costs for employers with 1 to 50 employees, up to the annual limit (Publication 560 (2025)); the credit is covered in tax credits for startups.

State pass-through entity tax (PTET) payments

Notice 2020-75 sets out the IRS position on state income taxes imposed on and paid by a partnership or S corporation, including taxes that apply because the entity elected them. The notice says such a payment is deductible by the entity in computing its taxable income for the tax year in which the payment is made, and that it is not a separately stated item that owners take into account on their own returns. Under that notice the payment date sets the federal year, so an entity that wants the deduction on its 2026 return pays by December 31, 2026. Whether a state offers an entity-level tax, when the election is due and how owners get credit for it are state rules, so confirm them with your state tax agency first.

The reason owners pay attention is the individual cap on state and local tax deductions. For 2026 it is $40,400 ($20,200 for a married person filing separately), reduced by 30% of modified adjusted gross income above $505,000, but not below $10,000 (IRC 164(b)(6), (7)).

Estimated tax: the January 15, 2027 payment

Owners who pay estimated tax have one 2026 installment left, due January 15, 2027. It can be skipped if the 2026 return is filed by February 1, 2027 with the full balance paid (Form 1040-ES (2026)). To stay clear of the underpayment penalty, withholding plus timely estimates should reach the smaller of 90% of the 2026 tax or 100% of the 2025 tax, and 110% of the 2025 tax when 2025 AGI topped $150,000 ($75,000 married filing separately). Calendar-year corporations make their last 2026 installment on December 15, 2026 (Publication 509 (2026)). Sizing that last payment, and using the annualized method when income arrived late in the year, is covered in quarterly estimated taxes.

Charitable giving by a business: what changed for 2026

P.L. 119-21 changed the charitable deduction for tax years beginning after December 31, 2025, and the change depends on how the business is taxed.

C corporations: a new 1% floor

A C corporation now deducts charitable contributions only to the extent they exceed 1% of its taxable income, and still no more than 10% of it (IRC 170(b)(2)(A)). Both tests use taxable income figured before the charitable deduction (IRC 170(b)(2)(D)). Illustration with round numbers: a corporation with $500,000 of taxable income gives $20,000. The floor is $5,000 and the cap is $50,000, so $15,000 is deductible. The $5,000 under the floor is lost, because amounts disallowed by the floor carry forward only from a year in which gifts also exceed the 10% cap (IRC 170(d)(2)(C)). Gifts over the cap carry forward for up to five years (IRC 170(d)(2)(B)).

Timing has one extra option. An accrual-method corporation whose board authorizes a gift during 2026 can pay it as late as the 15th day of the fourth month after year end, April 15, 2027 for a calendar year, and elect on the 2026 return to treat it as paid in 2026 (IRC 170(a)(2)).

S corporations and partnerships: the gift passes through

A partnership or S corporation does not deduct charitable contributions itself (IRC 703(a)(2)(C); IRC 1363(b)(2)). The contribution is reported to the owners, on Schedule K line 12a for an S corporation (Form 1120-S instructions), and each owner applies the individual rules, which also changed for 2026. Owners who itemize deduct gifts only above 0.5% of their contribution base (IRC 170(b)(1)(I)). Owners who take the standard deduction can deduct up to $1,000 of cash gifts ($2,000 on a joint return) to qualifying charities, but not gifts to donor-advised funds or supporting organizations (IRC 170(p)).

R&D records to capture before the year closes

A research credit is built from records, and the 2026 return asks for more of them. For tax years beginning after 2025, Section G of Form 6765, which reports costs by business component, is required unless the business is a qualified small business electing the payroll tax credit, or its total qualified research expenses are $1.5 million or less, its average annual gross receipts are $50 million or less and it claims the credit on an original return (Instructions for Form 6765, Rev. December 2025). Before December 31:

• List the business components worked on in 2026 (products, processes, software, techniques, formulas or inventions) and tie wages, supplies and contract research to each one (IRC 41(d)(2)).
• Keep the records in a form that shows the costs are eligible, as Treas. Reg. 1.41-4(d) requires. The R&D documentation checklist lists what to gather.
• If the company qualifies for the payroll election, plan for it now: it is made on the timely filed original 2026 return, is capped at $500,000 a year and cannot be made on an amended return (see the R&D credit for small businesses).
• Domestic research costs paid in 2026 are deductible under section 174A, or can be amortized over at least 60 months by election; section 174 explained covers the change.

How the credit itself works, and who qualifies, is in the R&D tax credit guide. For S corporation and partnership owners, the same year-end income projection also sets the 2026 QBI deduction, whose wage and service-business limits begin to apply above $201,750 of taxable income ($403,500 joint) for 2026 (Rev. Proc. 2025-32).

Sources: IRS Publication 538, Accounting Periods and Methods (Rev. January 2022); 26 CFR 1.461-1, general rule for taxable year of deduction; 26 CFR 1.451-2, constructive receipt of income; 26 CFR 1.263(a)-4, including the 12-month rule in paragraph (f); 26 CFR 1.404(b)-1T, deferred compensation timing; 26 U.S.C. 267, related-party deductions; 26 U.S.C. 448, limits on the cash method; IRS, Rev. Proc. 2025-32 (2026 inflation adjustments); IRS Publication 946 (2025), How To Depreciate Property; 26 U.S.C. 168, including 168(k); IRS, S corporation compensation and medical insurance issues; IRS Publication 15 (2026), Employer’s Tax Guide; 26 CFR 1.401(k)-1, cash or deferred arrangements; IRS, Retirement plan FAQs regarding contributions: S corporation; IRS, Notice 2025-67 (2026 retirement plan limits); IRS Publication 560 (2025), Retirement Plans for Small Business; 26 U.S.C. 401, including 401(b)(2); IRS, Retirement plan FAQs regarding SEPs; 26 U.S.C. 6654, individual estimated tax; IRS, General Instructions for Forms W-2 and W-3 (2026); IRS, Instructions for Forms 1099-MISC and 1099-NEC (Rev. December 2026); IRS, Notice 2020-75 (entity-level state income taxes); 26 U.S.C. 164, including the 2026 SALT limit; IRS, Form 1040-ES (2026); IRS Publication 509 (2026), Tax Calendars; 26 U.S.C. 170, charitable contributions; 26 U.S.C. 703, partnership computations; 26 U.S.C. 1363, effect of an S election on the corporation; IRS, Instructions for Form 1120-S (2025); IRS, Instructions for Form 6765 (Rev. December 2025); 26 CFR 1.41-4, qualified research and recordkeeping; 26 U.S.C. 174A, domestic research or experimental expenditures. Figures and rules checked against these sources on September 25, 2026. This is general information, not tax advice for your situation. Tax services are provided by licensed tax professionals under a separate engagement agreement. BEG does not provide tax advice.