That Sinking Feeling When You See Your Tax Bill
I remember sitting across from a client—let's call her Maria—who ran a thriving bakery. She'd grown her business from a farmers' market table to a brick-and-mortar shop in just three years. When I showed her the tax savings she'd missed the previous year, her face went pale. We're talking over $23,000 left on the table because she didn't know about deductions that were sitting right in front of her.
That conversation changed how I approach tax education for small business owners. The tax code isn't designed to be user-friendly. It's a 6,871-page maze of regulations, exceptions, and opportunities—most of which favor business owners who know where to look.
The good news? You're reading this in 2026, and the One Big Beautiful Bill Act (OBBBA) that passed last July has created some of the most favorable tax conditions for small businesses we've seen in years. The bad news? Most of your competitors won't take full advantage. Let's make sure you're not one of them.
The Qualified Business Income Deduction: Your 20% Discount on Taxes
If you operate as a sole proprietor, partnership, S corporation, or LLC taxed as a pass-through entity, the Qualified Business Income (QBI) deduction should be at the top of your planning list. This provision allows you to deduct up to 20% of your qualified business income directly from your taxable income. For a business generating $200,000 in QBI, that's a potential $40,000 reduction in taxable income—translating to real tax savings of $8,800 to $14,800 depending on your bracket.
Here's what changed under the OBBBA: this deduction is now permanent. No more sunset clauses, no more uncertainty about whether it'll exist next year. You can build long-term strategies around it.
The Expanded Phase-In Ranges
The OBBBA significantly widened the income thresholds where limitations begin to apply. For married couples filing jointly, the phase-in range expanded from $100,000 to $150,000 above the threshold amount. Single filers now have a $75,000 range instead of $50,000. What does this mean practically? If your taxable income falls between approximately $201,750 and $276,750 as a single filer (or $403,500 to $553,500 for joint filers), you'll now qualify for a larger partial deduction than you would have under the old rules.
There's also a new minimum deduction floor: if you have at least $1,000 of qualified business income from a trade or business in which you materially participate, you're guaranteed a minimum deduction of $400. This threshold will be adjusted for inflation in future years.
Specified Service Trade or Business Owners: You're Not Entirely Locked Out
If you're a doctor, lawyer, accountant, consultant, financial advisor, or operate another specified service trade or business (SSTB), the expanded phase-in ranges are particularly valuable. Previously, once your income exceeded the threshold, your deduction evaporated quickly. Now, the gradual reduction happens over a wider income band, allowing more service professionals to capture at least a partial benefit.
Consider this strategy: if you're near the phase-out threshold, maximizing retirement plan contributions can pull your taxable income back into the range where you qualify for a larger QBI deduction. A $66,000 Solo 401(k) contribution, for instance, could restore thousands in QBI benefits while also building your retirement nest egg.
Section 179 and Bonus Depreciation: Write Off Equipment Immediately
The OBBBA permanently restored 100% bonus depreciation and doubled the Section 179 expensing limit. This is massive for any business that purchases equipment, vehicles, computers, or machinery.
For 2026, the Section 179 deduction limit sits at approximately $2.56 million (adjusted for inflation), with the phase-out threshold beginning around $4.09 million in total equipment purchases. The deduction fully phases out once purchases exceed roughly $6.65 million. For most small businesses, this effectively means you can deduct the full cost of qualifying equipment in the year you place it into service.
How Section 179 and Bonus Depreciation Work Together
These two provisions aren't mutually exclusive—they're stackable. Apply Section 179 first (up to your limit and taxable income), then use bonus depreciation on any remaining basis. This ordering matters because Section 179 is limited by your business's taxable income, while bonus depreciation is not.
Qualifying property includes tangible personal property like machinery, equipment, computers, and office furniture. Software qualifies too—meaning those cloud subscriptions and enterprise tools you're purchasing can generate immediate deductions. Qualified improvement property (such as HVAC systems, fire alarms, and security systems for nonresidential buildings) also qualifies.
Vehicle Deductions: Know the Weight Classes
Vehicle write-offs follow specific rules based on gross vehicle weight rating (GVWR). Vehicles over 14,000 pounds—think box trucks, heavy-duty cargo vans, and commercial pickups—can potentially qualify for full Section 179 expensing without the special vehicle caps, assuming they're used more than 50% for business.
Heavy SUVs and trucks between 6,000 and 14,000 pounds face a special Section 179 cap (approximately $31,300 based on recent guidance) but can still combine this with bonus depreciation and regular MACRS depreciation. Lighter vehicles under 6,000 pounds have lower first-year caps.
Documentation is everything here. Maintain detailed mileage logs showing business versus personal use. If the IRS audits you and you can't substantiate that 50%+ business use threshold, you'll face recapture rules that claw back deductions you've already claimed.
The Home Office Deduction: Still Available, Still Valuable
Despite some confusion, the home office deduction remains fully available for self-employed individuals in 2026. What's not available? This deduction for W-2 employees. That distinction matters because many people who transitioned to remote work during the pandemic assumed they'd get a tax break. They don't—unless they also run a side business from that same space.
The Two Tests You Must Pass
Your home office must meet both the "regular use" and "exclusive use" tests. Regular use means you conduct business there consistently—not just occasionally when the mood strikes. Exclusive use means the space is dedicated to business activities only. That spare bedroom you also use as a guest room twice a year? It doesn't qualify. The corner of your living room where you've set up a desk exclusively for client work? That can qualify.
There's an exception to the exclusive use test for inventory storage. If you store product samples or inventory in your home, and your home is the only fixed location of your business, you don't need to meet the exclusive use requirement for the storage area.
Simplified vs. Actual Expense Method
The IRS offers two calculation methods. The simplified method gives you $5 per square foot of qualified space, up to 300 square feet, for a maximum deduction of $1,500. It's straightforward and requires minimal record-keeping.
The actual expense method typically yields larger deductions but requires more documentation. You'll calculate the percentage of your home used for business (usually based on square footage), then apply that percentage to indirect expenses like mortgage interest or rent, utilities, insurance, and general repairs. Direct expenses—like painting your home office—can be deducted in full.
If you own your home and use the actual expense method, you can also claim depreciation on the business portion. Just be aware: when you sell the home, you'll need to recapture that depreciation, potentially creating taxable gain even if your overall sale qualifies for the primary residence exclusion.
Retirement Plans: The Most Overlooked Tax Shelter
Small business retirement plans represent one of the most powerful legal tax shelters available. Yet I consistently meet business owners contributing nothing—or contributing far less than they could—to retirement accounts.
Let me put this in perspective. A Solo 401(k) allows total contributions of up to $72,000 for 2026 if you're under 50, combining employee deferrals ($23,500) with employer profit-sharing contributions (up to 25% of compensation). If you're between ages 60-63, the SECURE 2.0 Act's "super catch-up" provision allows an additional $11,250 in catch-up contributions, bringing your potential total even higher.
Comparing Your Options
SEP IRA: Contributions up to 25% of employee compensation or approximately 20% of net self-employment income, with a maximum of $72,000 for 2026. Easy to establish (you can open one as late as your tax filing deadline, including extensions) and simple to administer. The downside? No employee salary deferral component, so all contributions come from the employer side.
Solo 401(k): Combines employee deferrals with employer contributions. Must be established by December 31 to make employee deferrals for that year, though employer contributions can be made until your filing deadline. Allows loans from your account in many cases. More complex to administer, especially once plan assets exceed $250,000 (requiring annual Form 5500-EZ filing).
SIMPLE IRA: Designed for businesses with 100 or fewer employees. Lower contribution limits ($16,500 employee deferral for 2026, plus employer match or nonelective contribution). Must be established by October 1 for new plans, though businesses that started after October 1 can establish one as soon as administratively feasible.
The Tax Math
Every dollar you contribute to a traditional retirement plan reduces your taxable income dollar-for-dollar. At the 24% federal bracket, a $50,000 contribution saves you $12,000 in federal taxes alone. Add state taxes, and the savings compound further. Meanwhile, that money grows tax-deferred until retirement.
There's a compounding benefit too: reducing taxable income through retirement contributions can lower your AGI enough to qualify for or increase other deductions—including a larger QBI deduction if you're near the phase-out threshold.
The Research and Development Credit: Not Just for Tech Companies
Many small business owners assume the R&D tax credit is reserved for pharmaceutical companies and Silicon Valley startups. Wrong. If you're developing new products, improving existing ones, creating software, designing manufacturing processes, or even developing new formulas or recipes, you may qualify.
Under the OBBBA, R&D expenses are once again fully and immediately deductible in the year incurred—reversing the problematic 5-year amortization rule that had been in effect. Small businesses can even amend their 2022, 2023, and 2024 returns to retroactively apply immediate expensing and claim refunds.
The credit itself provides either a dollar-for-dollar reduction in taxes owed or (for qualified small businesses) can offset payroll taxes. The calculation methodology is complex enough that you'll want professional help, but the payoff can be substantial—potentially tens of thousands of dollars for qualifying activities you're already doing.
Employee-Related Credits and Deductions
The Employer-Provided Childcare Credit
Beginning in 2026, the OBBBA dramatically enhanced this credit. The rate increased from 25% to 40% of qualified childcare expenditures (50% for eligible small businesses), and the maximum credit jumped from $150,000 to $500,000 ($600,000 for small businesses). If you're considering offering childcare benefits to attract and retain talent, the economics just became significantly more favorable.
Wages, Benefits, and Payroll
Employee wages and benefits are fully deductible. This includes salaries, bonuses, health insurance premiums, retirement plan contributions you make on employees' behalf, and payroll taxes you pay as the employer. Even independent contractors are deductible—though ensure anyone paid $2,000 or more receives a 1099-NEC (note: the OBBBA raised this threshold from $600).
The OBBBA also introduced tax-free treatment for certain overtime wages and tips for employees (not employers). While this doesn't directly reduce your business taxes, it does mean employees in affected industries take home more pay, potentially reducing pressure for wage increases.
Everyday Deductions That Add Up
Business Travel
When travel is ordinary and necessary for your business, the expenses become deductible. This includes airfare, lodging, ground transportation, and 50% of meals while traveling. The key requirement: the trip must have a legitimate business purpose. Attending a conference, meeting clients, or scouting new markets qualifies. Adding three personal vacation days to a business trip doesn't disqualify the business portion, but you'll need to allocate expenses appropriately.
Keep detailed records. For each trip, document the business purpose, who you met with (if applicable), and the dates of travel. Credit card statements aren't sufficient—maintain actual receipts.
Vehicle Expenses
If you use a personal vehicle for business, you have two options. The standard mileage rate (expected to increase slightly above 70 cents per mile for 2026) offers simplicity—just multiply business miles by the rate. The actual expense method allows you to deduct the business percentage of gas, insurance, repairs, depreciation, and other vehicle costs. The actual method often produces larger deductions for expensive vehicles with high operating costs, while the standard mileage rate works better for fuel-efficient cars with lower expenses.
Whichever method you choose, a contemporaneous mileage log is essential. Apps like MileIQ, Everlance, or Hurdlr automatically track drives and categorize them as business or personal. The few minutes of setup time saves hours at tax time and provides audit-proof documentation.
Professional Services
Fees paid to lawyers, accountants, bookkeepers, consultants, and other professionals are fully deductible. This includes tax preparation fees for your business return, legal fees for drafting contracts, accounting software subscriptions, and payroll service costs. If you're reading this article and subsequently hire a tax professional to help you implement these strategies, that fee is deductible too.
Marketing and Advertising
Every dollar spent promoting your business is deductible. This includes digital advertising (Google Ads, Meta ads, LinkedIn campaigns), print advertising, website development and hosting, social media management tools, promotional materials, and business cards. If you sponsor a local little league team or advertise on a community newsletter, those costs qualify too.
Software and Subscriptions
The tools that run your business—accounting software, CRM systems, project management platforms, email marketing services, cloud storage, industry-specific applications—are all deductible. Even your Zoom subscription and Microsoft 365 license count. These expenses are often overlooked because they're small individually, but they add up. A business spending $200/month on various software subscriptions deducts $2,400 annually.
Education and Training
Expenses that maintain or improve skills required in your current business are deductible. This includes professional development courses, industry conferences, certifications relevant to your work, and professional publications. The key limitation: education that qualifies you for a new career or meets minimum job requirements isn't deductible.
Self-Employment Tax Strategies
Self-employed individuals pay both the employer and employee portions of Social Security and Medicare taxes—a combined 15.3% on net earnings up to the Social Security wage base ($174,900 for 2026), plus 2.9% Medicare tax on earnings above that. The self-employment tax hit feels particularly painful because it's in addition to income tax.
You can deduct half of your self-employment tax when calculating adjusted gross income, which provides some relief. But the more powerful strategy involves entity structure optimization.
The S Corporation Election
By electing S corporation status (either by incorporating or electing for your LLC to be taxed as an S corp), you can reduce self-employment taxes by splitting business income between "reasonable salary" and distributions. Salary is subject to payroll taxes. Distributions are not.
Here's a simplified example: Your business generates $150,000 in profit. As a sole proprietor, you'd pay approximately $21,000 in self-employment tax. As an S corp paying yourself a $70,000 salary (which must be "reasonable" for your role and industry), only that $70,000 faces payroll taxes—cutting the SE tax burden roughly in half. The remaining $80,000 comes as a distribution, subject only to income tax.
This strategy isn't free. S corps require more administrative overhead, including payroll processing, additional tax filings (Form 1120-S), and potentially higher accounting fees. The math typically favors S corp election once net business income consistently exceeds $50,000-$60,000, though your specific situation may vary.
Timing Strategies: Accelerate and Defer
The timing of income and expenses can shift tax liability between years. Basic principles: accelerate deductions into higher-income years, defer income into lower-income years.
In practice, this might mean:
Prepaying certain expenses in December that would otherwise be due in January (insurance premiums, certain rent payments, professional memberships). Making planned equipment purchases before year-end to capture current-year depreciation. Delaying invoicing major projects until January if you expect lower income next year. Maximizing retirement contributions by your filing deadline for the prior year.
The OBBBA's permanent extension of the QBI deduction adds a new dimension. If you're near the phase-out thresholds, accelerating deductions to reduce taxable income below the threshold—or deferring income to stay within range—can unlock substantial additional tax savings through a larger QBI deduction.
Record-Keeping: The Foundation of Every Deduction
Here's the uncomfortable truth: deductions you can't substantiate don't exist. The IRS won't accept "I'm pretty sure I spent around $5,000 on supplies" as documentation.
Maintain receipts for all business expenses. Digital tools like Dext, Shoeboxed, or even your phone's camera make this manageable. Organize by category and date. Keep business and personal expenses strictly separated—ideally through separate bank accounts and credit cards.
For vehicle use, maintain a mileage log. For home office deductions, keep records of total home expenses and your office's square footage. For meal and entertainment expenses (limited to 50% deductibility), note who you met with and the business purpose.
The IRS generally has three years to audit a return, though this extends to six years if substantial income is unreported. Maintain records for at least seven years to be safe. Cloud storage makes this essentially costless.
When to Get Professional Help
Tax preparation software handles straightforward situations well. But if you're dealing with significant business income, multiple entities, S corp elections, complex depreciation calculations, or any of the advanced strategies discussed here, the ROI on professional help almost always exceeds the cost.
A skilled tax professional doesn't just prepare returns—they identify opportunities you'd miss, help you restructure for tax efficiency, and represent you if questions arise. They'll also stay current on the constant changes in tax law (like the OBBBA provisions that took effect this year) so you don't have to.
When selecting an advisor, look for someone who works specifically with small businesses in your industry. A CPA who primarily serves large corporations won't be as attuned to the strategies that benefit entrepreneurs. Ask about their approach to planning (not just compliance), their communication style, and how they stay current on tax law changes.
Your Action Plan for 2026
Tax savings don't happen by accident. They require intentional planning, timely execution, and consistent documentation. Start with the highest-impact items: maximize retirement plan contributions, evaluate whether an S corp election makes sense, and ensure you're capturing every deduction the code allows.
Review your situation quarterly—not just at year-end when options become limited. Make estimated tax payments that reflect your projected liability, avoiding both underpayment penalties and the opportunity cost of overpaying throughout the year.
The tax code will never be simple. But with the right knowledge and professional support, it can become a tool that works in your favor rather than against you. Maria—the baker I mentioned at the start—now pays thousands less in taxes each year than she did before we optimized her strategy. The rules that enabled her savings are the same ones available to you.
The question isn't whether opportunities exist. It's whether you'll take the time to capture them.