By Vesela Harris, CPA, EA | JE Tax Advisors LLC
Updated October 19, 2026 | For the 2026 tax year
A profitable year is good news. Finding out in April that you owe far more tax than expected is less welcome.
Small business tax savings usually come from a combination of decisions: keeping accurate books, choosing an appropriate tax structure, funding retirement, and handling expenses correctly. Some decisions need attention before December 31. Others depend on how your business and personal returns fit together.
This guide explains practical options for sole proprietors, LLC owners, partners, and S corporation shareholders. The right combination depends on your profit, employees, household income, and cash needs.
1. Start with reliable numbers
Before making tax decisions, find out what the business actually earned. A bank balance is not the same as taxable profit.
Reconcile your accounts, review income and expenses, and separate loan proceeds, owner contributions, and transfers from sales. Check for business purchases paid with personal funds and personal purchases recorded as business expenses.
Ordinary and necessary expenses may include advertising, software, professional fees, insurance, and supplies. Mixed-use expenses need a reasonable business allocation. Equipment and other capital costs may follow different deduction rules.
For example, a $75 monthly software subscription is $900 over the year. Missing several recurring charges can understate your expenses. Keeping receipts and reviewing transactions monthly makes these easier to catch.
IRS guidance: Business income and expenses
2. Review whether your tax structure still fits
An LLC does not automatically save income or self-employment tax. Its federal tax treatment depends on its ownership and any elections made.
For an eligible business, S corporation taxation can sometimes reduce employment taxes on profit remaining after appropriate shareholder wages. However, an owner who works in the business must receive reasonable compensation for services before non-wage distributions replace that pay.
Compare potential savings with payroll costs, additional return preparation, state taxes, retirement contributions, and administration. There is no single profit level at which an S corporation is best for everyone.
If you already have an S corporation, review compensation before year-end. Taking distributions without addressing wages can create an expensive correction.
IRS guidance: LLC tax classification and S corporation compensation
3. Understand the qualified business income deduction
Eligible owners of sole proprietorships, partnerships, and S corporations may receive a deduction of up to 20% of qualified business income, commonly called QBI. It is an owner-level deduction, not a deduction for 20% of business sales.
The QBI deduction continues in 2026. A new $400 minimum deduction can apply to qualifying taxpayers with at least $1,000 of aggregate QBI from qualified businesses in which they materially participate, subject to the applicable rules.
For the regular calculation, household taxable income, business type, wages, qualified property, and losses can affect the result. S corporation wages paid to the owner do not qualify as QBI.
Retirement contributions and certain other deductions can also reduce QBI. That does not necessarily make them a bad choice; it means the savings should be calculated together.
IRS QBI calculation instructions and 2026 tax provisions
4. Choose a retirement plan before rushing to make a contribution
A retirement plan can help you build savings while reducing current taxable income when contributions qualify for a deduction.
Important 2026 limits include:
| Plan or contribution type | 2026 limit before catch-up contributions |
|---|---|
| Regular 401(k) employee elective deferrals | $24,500 |
| Regular SIMPLE IRA employee salary reductions | $17,000 |
| Defined contribution plan annual additions, including employee and employer contributions | $72,000 |
| SEP IRA employer contributions | Up to $72,000, subject to compensation limits |
These are different limits, not amounts every business owner can automatically contribute. Some SIMPLE plans have higher limits. Employer contributions depend on compensation; self-employed owners use a special calculation.
A solo 401(k) generally covers an owner with no eligible common-law employees, or the owner and spouse. If you also have a day job with a 401(k), your employee deferral limit generally applies across those plans.
Catch-up contributions may be available. Some higher-paid employees must make catch-up contributions as Roth in 2026, so an additional contribution does not always mean an additional current deduction.
Ask about plan establishment, elections, funding deadlines, and employee costs early.
IRS 2026 retirement limits, solo 401(k) rules, and 2026 Roth catch-up threshold
5. Plan equipment purchases around business needs
If you need a computer, machinery, or other equipment, review the deduction before buying it.
For tax years beginning in 2026, the maximum Section 179 deduction is $2,560,000. That limit begins decreasing when qualifying property placed in service exceeds $4,090,000. Business-income limits and special restrictions, including vehicle rules, also apply.
100% bonus depreciation is generally available for eligible property acquired and placed in service after January 19, 2025, subject to acquisition and other requirements. It is a separate provision with different rules.
“Placed in service” matters. Ordering or paying for equipment in December is not enough if it is not ready and available for business use until January.
The largest immediate deduction is not always the best result. Consider future income, loss limitations, state treatment, and possible recapture.
A deduction also doesn’t make equipment free. If a $5,000 purchase produces $1,200 in tax savings, you still spent $3,800 after that assumed benefit.
IRS guidance: Depreciation and Section 179
6. Handle owner expenses through the correct process
S corporation owners often pay for business mileage, supplies, or phone service personally. Without a reimbursement process, these expenses can be missed or recorded incorrectly.
A properly operated accountable plan lets a corporation reimburse eligible employee business expenses without treating the reimbursement as wages. The arrangement must require a business connection, timely substantiation, and return of excess advances.
Keep expense reports and supporting records. A round-number monthly payment without documentation is not automatically tax-free.
Sole proprietors generally record qualifying business expenses directly rather than reimburse themselves as employees. Partners have separate rules. An expense can be legitimate while the method of claiming it still needs correction.
IRS guidance: Accountable plans
7. Document home office and vehicle use
For an eligible self-employed person, a home office can generate a deduction when the space meets the regular, exclusive, and qualifying business-use requirements. Certain exceptions apply. Compare actual expenses with the simplified method rather than assume one is better.
Under the actual method, potentially eligible costs include a business share of rent, utilities, and mortgage interest—not mortgage principal payments. S corporation owners should review an appropriate reimbursement arrangement.
For business driving, keep a log showing dates, mileage, destinations, and business purposes. Ordinary commuting generally does not qualify.
The optional 2026 business mileage rates are:
| Travel dates | Rate |
|---|---|
| January 1–June 30 | 72.5 cents per mile |
| July 1–December 31 | 76 cents per mile |
Compare the standard mileage method with eligible actual expenses. Generally, you cannot deduct mileage and then add gas, insurance, repairs, and depreciation for the same use.
IRS home office rules, mileage rates, and vehicle expense rules
8. Check health insurance reporting
Eligible self-employed owners may deduct qualifying health insurance premiums for themselves and certain family members without itemizing. The deduction is subject to qualifying earned-income limits and restrictions for months when subsidized employer coverage was available, including through a spouse.
More-than-2% S corporation shareholders have additional requirements. Premiums generally must be paid or reimbursed by the corporation and included in the shareholder’s W-2 wages for the shareholder to claim the deduction, assuming other requirements are met.
Review this with your preparer and payroll provider before the final payroll. A policy in your personal name does not automatically disqualify it, but payment and reporting matter.
IRS self-employed insurance instructions and S corporation insurance rules
9. Hire family members only for real business work
Paying a family member can be appropriate when the business needs the work and the compensation is reasonable. Keep job descriptions, time records, evidence of payment, and required payroll filings.
Special federal payroll-tax exceptions may apply to a child working for a parent’s sole proprietorship or a partnership owned only by the child’s parents. Generally, qualifying wages paid to children under 18 are exempt from Social Security and Medicare taxes, and wages paid to children under 21 are exempt from FUTA.
Those exceptions generally do not apply when the employer is a corporation, including an S corporation.
Do not assume every family payment is deductible or that child labor laws stop applying because you own the business.
IRS guidance: Family employees and corporate payroll rules
10. Review timing, credits, and tax payments
For cash-method businesses, eligible expenses are generally deducted when paid, while income is generally taxable when actually or constructively received.
That does not make every prepayment immediately deductible. Nor can you defer income simply by leaving an available check undeposited. Delaying an invoice also does not change income recognition for every accounting method.
Compare this year’s and next year’s expected income before accelerating expenses. Sometimes timing shifts tax rather than permanently reducing it.
Also review business tax credits. For example, eligible small employers may qualify for a retirement-plan startup credit of up to $5,000 annually for three years. The calculation and eligibility rules matter; an owner-only plan generally will not satisfy the requirement to cover a non-highly compensated employee.
Finally, update estimated taxes as profit changes. Timely payments do not reduce the underlying tax, but they can prevent avoidable underpayment penalties. Filing an extension generally does not extend the payment deadline.
IRS accounting-method rules, retirement startup credit, and estimated taxes
What should you review before year-end?
Bring your current profit-and-loss statement, balance sheet, payroll reports, prior returns, retirement details, and planned purchases to a tax-planning meeting. Include your spouse’s income and other household income when relevant.
Then ask:
- What is my projected federal and state tax for 2026?
- Are my estimated payments and withholding enough?
- Would a retirement contribution or needed equipment purchase help?
- Are shareholder wages, insurance, and reimbursements handled correctly?
- Which actions need to happen before December 31?
The goal is to make decisions while you still have options. Waiting until the return is being prepared can leave fewer choices.
Small business tax planning with JE Tax Advisors
At JE Tax Advisors LLC, I help small business owners with accounting, tax preparation, and planning, including S corporation, partnership, and individual returns.
I look at the business return alongside the owner’s personal taxes so that compensation, retirement, deductions, and estimated payments can be considered together.
Based in Auburn, Georgia, I work with clients throughout metro Atlanta and remotely. Contact JE Tax Advisors or call 470-403-0754 to discuss your business.
For more deduction ideas, read What Tax Deductions Do Most People Miss?
This article addresses federal tax rules for 2026 under guidance available as of October 19, 2026. Georgia and other states may follow different rules. Eligibility and tax savings depend on your circumstances.