Tax Strategies for Business Owners: How to Reduce Your Tax Bill in 2026

The 2026 Reality Check

Most business owners treat tax season as a historical reporting event. In 2026, if you aren't planning proactively, you are likely overpaying. The One Big Beautiful Bill Act (OBBBA) has restored some massive benefits like 100% Bonus Depreciation but it also introduced "High Earner Penalties" that can strip away your deductions if your Modified AGI exceeds $500,000.

If you are a business owner, this blog is for you. It will outline 5 simple ways to reduce your tax bill in 2026. No fluff, just simple strategies you can implement.

Here are each of the strategies we will review in detail in this blog.

The Strategy	What You Get	The 2026 Bottom Line
The Retirement "Stack"	Massive immediate income deduction	Combine 401(k) and Cash Balance plans to shelter $370k+
Entity Optimization	Payroll & capital gains savings	Utilize S-Corps for SE tax or C-Corps for the $15M QSBS exclusion
Real Estate Engine	Accelerated "paper" losses	Use 100% Bonus Depreciation and REPS status to offset active income
SALT Cap Bypass	Unlimited state tax deduction	Beat the $40,400 cap phase-out with a Pass-Through Entity Tax (PTET) election
Year-End Timing	Tactical control of tax liability	Defer revenue and accelerate expenses using Cash Method accounting

1. Retirement Plans: The "Stacking" Strategy

Most business owners under-utilize retirement vehicles, viewing them as simple savings accounts rather than the massive tax-shielding tools they are. By layering different plan types, you can create a "stack" that shelters hundreds of thousands of dollars from the IRS.

• Solo 401(k) (2026 Limits):

  
  

  • Employee Deferral: $24,500. This is the amount you can contribute as an employee of your own business.

    
    

  • Total Limit (Employee + Employer): $72,000. Your business can contribute additional "employer" funds, typically up to 25% of your compensation, as long as the total doesn't exceed this cap.

    
    

  • Catch-Up (Age 50+): $8,000 (Total: $80,000).

    
    

  • "Super" Catch-Up (Age 60–63): Under the latest provisions, if you fall into this specific age bracket, your catch-up limit increases to $11,250, bringing your total potential 401(k) contribution to $83,250.

    
    

• Defined Benefit / Cash Balance Plans:

  
  

  • The Heavy Hitter: These plans function like a "private pension" for the business owner. They allow for significantly higher contributions than a 401(k) because they are based on the "benefit" you want to receive at retirement rather than a flat contribution cap.

    
    

  • 2026 Limits: For 2026, the maximum annual benefit limit has been raised to $290,000.

    
    

  • The Strategy: By "stacking" a Cash Balance plan on top of a 401(k), a business owner in their 50s can often deduct $250,000 to $400,000+ in a single year, effectively wiping out the tax bill on a massive portion of their income.

    
    

• The 2026 Advantage:

  
  

  • Immediate Vesting: In many of these owner-only structures, you are 100% "vested" in the contributions from day one, meaning the money is yours immediately and cannot be taken back by the plan.

    
    

  • Tax-Deferred Growth: Every dollar put into these plans grows tax-free until you withdraw it in retirement, which, as many owners find, is often a time when they are in a much lower tax bracket.

Your takeaway should be reviewing your retirement plan strategy. If you haven't looked at it for a while, you are likely leaving money on the table.

2. Choosing the Right Engine: S-Corp, Partnership, or C-Corp?

Your entity structure isn’t just a legal checkbox, it’s the engine that determines how much of your hard-earned revenue actually lands in your pocket. The One Big Beautiful Bill Act (OBBBA) has introduced new incentives and traps for 2026, making it critical to match your entity to your long-term goals.

S-Corporations: The Cash Flow King

For most profitable service businesses and mid-sized operations, the S-Corp remains the gold standard for annual tax savings.

• Self-Employment Tax Savings: Unlike a sole proprietorship, where 100% of your profit is hit with a 15.3% self-employment tax, an S-Corp allows you to split income. You pay yourself a "reasonable salary" (subject to payroll tax) and take the rest as a "distribution" (exempt from self-employment tax).

  
  

• The 2026 Math: If your business clears $400,000 and you set a reasonable salary of $150,000, you only pay social security and medicare taxes on that $150k. The remaining $250k is distributed tax-free from a self-employment perspective, saving you roughly $9,500 to $12,000 every single year.

  
  

• PTET Efficiency: S-Corps are perfectly positioned to utilize the Pass-Through Entity Tax (PTET) election, allowing you to bypass the personal SALT cap phase-outs that now kick in at $500,000 of income.

  
  

Partnerships: Maximum Flexibility

If your business has multiple owners or complex profit-sharing arrangements, the Partnership structure offers a level of customization that other entities can't match.

• Special Allocations: Unlike S-Corps, which must distribute profit strictly according to ownership percentage, Partnerships can allocate "special" distributions or losses to specific partners. This is a massive tool if one owner needs the tax write-off more than another.

  
  

• Step-Up in Basis: Partnerships allow for a "Section 754" election. If an owner exits or a new one buys in, the business can "step up" the basis of its assets to the current market value, creating fresh depreciation deductions for the remaining owners.

  
  

• 100% Bonus Depreciation: Because the OBBBA made 100% bonus depreciation permanent, Partnerships can pass massive immediate write-offs from equipment or real estate directly to partners' personal returns.

  
  

C-Corporations: The Exit Strategy & The $15M QSBS Exclusion

For the first time in decades, the C-Corp is becoming a preferred choice for high-growth businesses due to the massive expansion of Section 1202, also known as Qualified Small Business Stock (QSBS).

• The $15M Windfall: Under the OBBBA, stock issued after July 4, 2025, now carries an increased federal capital gains exclusion of $15 million (up from $10M).

  
  

• The $75M Asset Test: The OBBBA raised the "Gross Asset Test" limit to $75 million, meaning your business can grow much larger and still issue tax-free stock to founders and early employees.

  
  

• Tiered Exclusions: You no longer need to wait 5 full years for a benefit. The 2026 rules allow for a 50% exclusion after only 3 years and a 75% exclusion after 4 years.

  
  

• The Double Taxation Trap: While the C-Corp is the "Holy Grail" for exits, it remains inefficient for businesses that want to distribute annual cash flow. You are taxed at the corporate level, and again at the personal level when you take a dividend. Use a C-Corp if you are building to sell, not if you are building to fund a lifestyle.

Don't settle for simply filing your tax return in 2026. Let this be the year that you review your entity structure. After all, this could be the difference in your paying millions of extra dollars to the IRS.

3. Real Estate: Maximizing 100% Bonus Depreciation and REPS

For business owners, real estate shouldn't just be an investment; it should be a strategic tax engine. The One Big Beautiful Bill Act (OBBBA) permanently restored 100% Bonus Depreciation, reversing the previous phase-down and creating a powerful avenue to offset high active income.

The "Permanent" 100% Bonus Depreciation

Under the OBBBA, the ability to immediately expense the full cost of qualifying property is now a permanent fixture of the tax code.

• Immediate Write-Offs: You can deduct 100% of the cost of qualifying equipment and property components with a "useful life" of 20 years or less in the year they are placed in service.

  
  

• Cost Segregation Studies: This is the technical linchpin. A study identifies and reclassifies portions of your real estate (like lighting, flooring, or landscaping) from a 39-year or 27.5-year recovery period into 5, 7, or 15-year buckets. These accelerated buckets qualify for 100% bonus depreciation, allowing you to front-load decades of deductions into Year 1.

  
  

Unlocking the "REPS" Shield

The most common trap for business owners is having massive "paper losses" from depreciation that they cannot use because the IRS classifies rental activity as "passive." To use these losses to offset your active business income, you must qualify as a Real Estate Professional (REPS).

• The 750-Hour Rule: You (or your spouse, if filing jointly) must spend more than 750 hours per year in real property trades or businesses.

  
  

• The >50% Rule: You must spend more than half of your total working time in real estate. For many business owners, this is the hardest hurdle.

  
  

• Material Participation: Beyond REPS status, you must "materially participate" in each specific rental property (typically 100–500 hours depending on the test used) to convert the loss from passive to active.

  
  

The Short-Term Rental (STR) Loophole

If you cannot meet the REPS hour requirements due to your primary business, the STR Loophole offers a technical workaround.

• The 7-Day Rule: If the average stay at your property is 7 days or less, the IRS does not classify it as a "rental activity" under Section 469.

  
  

• Active Offset: If you materially participate in the STR, the resulting depreciation losses are considered "active" and can offset your W-2 or K-1 income, even if you don't qualify as a full-time Real Estate Professional.3. Real Estate: 100% Bonus Depreciation is Permanent

Real estate can be an amazing tax strategy, but you need to make sure you aren't doing it only for tax benefits. A bad real estate deal can wipe you out if you aren't careful.

4. Bypassing the 2026 SALT Cap and the "High Earner" Trap

One of the most significant changes under the One Big Beautiful Bill Act (OBBBA) is the permanent extension of the SALT (State and Local Tax) deduction cap, combined with a temporary "bump" that features a sharp sting for high-income business owners.

The 2026 SALT Calculation: $40,400 with a Catch

While the headlines celebrate the increase of the SALT cap to $40,400 for the 2026 tax year, the law introduces a "High Earner Penalty" that can quickly erode these benefits.

• The Phase-Out Threshold: The $40,400 cap is only fully available to joint filers with a Modified Adjusted Gross Income (MAGI) below $505,000.

  
  

• The 30% Haircut: For every dollar your income exceeds this threshold, your SALT deduction is reduced by 30 cents.

  
  

• The Floor: This phase-out continues until your deduction hits $10,000, which serves as the permanent floor for the deduction regardless of how high your income goes.

  
  

• The Result: If your MAGI hits $606,334 or higher, your SALT deduction is effectively reset to the old $10,000 limit, making the "increase" completely irrelevant for many successful business owners.

  
  

The PTET Strategy: Shifting from Personal to Entity

To counter this, business owners should utilize the Pass-Through Entity Tax (PTET) election, which the OBBBA explicitly left intact.

• Unlimited Federal Deduction: When your S-Corp or Partnership makes a PTET election, the state taxes are paid at the entity level rather than the individual level.

  
  

• Above the Line Benefit: Because these are considered business expenses, they are 100% deductible on your federal return and are not subject to the $40,400 personal SALT cap or the $505,000 phase-out.

  
  

• Self-Employment Tax Savings: For partnerships, paying tax at the entity level reduces the net distributive share of income, which can also lower your self-employment (SE) tax liability.

  
  

Unlocking the Standard Deduction

By moving your state tax burden to the business entity via PTET, you may find that your remaining personal itemized deductions (like mortgage interest) fall below the $32,200 standard deduction for joint filers.

• The "Double Dip": You essentially get to "double dip" by taking a full business deduction for your state taxes via PTET and still claiming the full standard deduction on your personal return.

  
  

• 2026 Bonus: Starting in 2026, the OBBBA also allows a new above-the-line charitable deduction of up to $2,000 for joint filers who do not itemize, further increasing the value of this strategy.

If you are in a high-income tax state like California or New York, look into this early in the year. There can be special state rules that you need to follow earlier in the year.

5. Year-End Timing: Cash vs. Accrual and the "Check-in-Hand" Rule

If your business has under ~$30M in receipts, you likely qualify for the Cash Method of accounting. This is arguably the most powerful lever you have for year-end tax planning because it allows you to control the exact moment income is recognized and expenses are deducted.

The Power of Revenue Deferral

Under the cash method, income is generally not taxed until it is "actually or constructively" received. This creates a massive window for strategic timing as December 31st approaches.

• The Invoicing Strategy: If you have a high-income year and want to push tax liability into 2027, delay your final December billings until the very end of the month. If the client doesn't pay until January, that income is not taxable on your 2026 return.

  
  

• The Constructive Receipt Trap: A common mistake business owners make is holding a check in their desk drawer. If a client hands you a check on December 30th, the IRS considers that "constructive receipt." Even if you don't walk into the bank until January 2nd, that money is taxable in 2026 because it was available to you. To truly defer income, the payment must not be in your possession by midnight on New Year's Eve.

  
  

Accelerating Expenses: The 12 Month Rule

Conversely, you can "pull forward" 2027 expenses into 2026 to lower your current tax bill.

• Pre-Paying Operations: You can pre-pay for up to 12 months of insurance, software subscriptions, or rent. As long as the benefit doesn't extend beyond one year, the IRS allows you to deduct the full amount in the year you pay it.

  
  

• Inventory and Supplies: If you know you’ll need $50,000 in supplies for Q1 of 2027, buying them in late December 2026 creates an immediate deduction.

  
  

Year-End Bonuses: Timing is Everything

Bonuses are a dual-purpose tool: they reward your team and provide a significant tax shield for the business. However, the timing rules differ based on your entity structure.

• S-Corps and Partnerships: For owners and "related parties," the bonus must be paid (and the check must be out of your hands) by December 31st to count as a 2026 deduction.

  
  

• C-Corporations: C-Corps have a slight advantage; they can sometimes deduct bonuses in 2026 even if they aren't paid until early 2027 (specifically within 2.5 months of year-end), provided the obligation was "fixed and determinable" by year-end.

  
  

• The Strategy: If you are having a banner year, increasing your year-end bonus pool is one of the fastest ways to lower your business's net profit and your personal tax bill while investing back into your company's most valuable asset: your people.5. Mastering the Cash Method Timing

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If you are a business owner looking to better understand tax planning, schedule a call and talk with a Moment founder.

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Frequently Asked Questions

Here are some answers to questions I received frequently about this topic.

1. Is the SALT cap really $40,000 now? Yes, it is indexed to $40,400 for 2026, but high earners (> $500k AGI) will see this deduction reduced by 30% of the excess income.

2. Can I still use PTET if the SALT cap is higher? Yes. In fact, it is more important for high earners because the PTET bypasses the new phase-outs that apply to the personal SALT deduction.

3. What is the "Super" catch-up for 401(k)s? Starting in 2025/2026, business owners aged 60, 61, 62, or 63 can contribute an increased catch-up amount (approximately $11,250) instead of the standard $8,000.

4. Does 100% Bonus Depreciation apply to everything? No. It applies to assets with a "useful life" of 20 years or less. It does not apply to the structural building of a rental property, though a Cost Segregation Study can help you find components that do qualify.

5. How do I qualify for the $15M QSBS exclusion? You must hold stock in a domestic C-Corp with less than $75M in gross assets at issuance for at least 5 years. However, the OBBBA now allows for partial exclusions (50–75%) if you sell after only 3 or 4 years.

6. Can I pay my kids to lower my taxes?

Yes. You can pay your children for legitimate business work. For 2026, you can pay them up to the standard deduction (~$16,100) tax-free to them, while your business takes a full deduction at your higher tax bracket.

7. When is the deadline for a 2026 Cash Balance Plan? The plan must generally be adopted by your tax filing deadline (including extensions), but it is best practice to have it established by December 31, 2026, to ensure the deduction is locked in.

8. Is the 1099 reporting threshold still $600? No. The OBBBA officially raised the 1099-NEC reporting threshold to $2,000 for the 2026 tax year.

9. Why should I use the Cash Method instead of Accrual? The Cash Method allows you to control the timing of your income. You only pay taxes when the money hits your bank account, which is better for your business's cash flow.

10. How does the "High Earner Penalty" work on SALT? It is a "haircut" on your deduction. For joint filers, the $40,400 cap is reduced by 30 cents for every dollar your MAGI is over $500,000. This makes the PTET election the only way to get a full, uncapped state tax deduction.

Moment Private Wealth offers information on tax and estate planning that is general in nature. Tax and Legal advice are not provided by Moment Private Wealth. Consult an attorney or tax professional regarding your specific legal or tax situation.

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