With year-end approaching, it's time to plan for tax season. Proactive tax planning gives businesses and entrepreneurs time to shape their income, deductions, and cash flow before December 31. This year-end tax planning checklist for small businesses walks you through records, timing, depreciation, deductions, and more, so you can approach your 2026 tax year with confidence.
Why Year-End Tax Planning Matters for Business Owners
Every Many business owners think of taxes as a spring deadline. By then, most decisions affecting the prior year’s bill are locked in. A final review between October and December gives you time to address changes in income, cash flow, or business goals while you can still act.
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A year-end review may help you:
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Reduce taxable income by thoughtfully timing income and deductible expenses
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Identify overlooked deductions and credits
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Plan for payments without disrupting operations or growth
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Avoid penalties associated with underpayments or late filings
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Make sound decisions about entity structure, compensation, benefits, and major purchases
What Should Be on Your Year-End Tax Planning Checklist?
Use these steps as a starting point. Then work with your tax advisor to determine which strategies fit your entity type, financial situation, and long-term goals.
1. Gather Your Financial Records
Start by organizing the core records needed to prepare your business tax return, including:
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Year-to-date income statement and current balance sheet
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Payroll records, including wages, withholdings, deposits, and benefits
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Reconciled bank and credit card statements for every business account
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Loan statements showing principal balances and interest paid
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Completed Forms W-9 for contractors who may require a Form 1099-NEC
Compare loan statements with your books so principal and interest are correctly recorded. Also separate personal and business expenses. Commingled spending is harder to substantiate and may weaken the legal separation between you and your business. Record personal expenses paid from business accounts as owner draws or distributions.
2. Review the Timing of Income and Expenses
Moving income or expenses by a few weeks may shift them into another tax year. If you expect a higher tax rate in 2027, recognizing additional income in 2026 may be beneficial. If 2026 is the higher-income year, deferring income may be better.
Cash-method businesses generally recognize income when they actually or constructively receive it. This means a check received in December counts as 2026 income even if you deposit it in January 2027.
Paying qualifying expenses by December 31 may also help reduce 2026 taxable income. Examples include repairs, professional fees, software subscriptions, and supplier invoices.
Different timing rules apply to accrual-method businesses, prepaid expenses, owners, and related parties. Review timing decisions with your tax advisor before acting.
3. Maximize Depreciation and Asset Deductions
If your business purchased equipment, vehicles, or technology in 2026, depreciation may offer a valuable planning opportunity. The One Big Beautiful Bill Act (OBBBA) made several provisions more favorable:
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Qualified property acquired and placed in service after January 19, 2025, may qualify for 100% bonus depreciation.
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Property acquired before January 20, 2025, remains subject to earlier phase-down rules. Pay attention to binding contract dates; they may affect which rules apply.
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For tax years beginning in 2026, the maximum Section 179 deduction is $2.56 million, with the phaseout beginning when qualifying purchases exceed $4.09 million. For 2026, heavy SUVs weighing 6,000–14,000 pounds are subject to a separate $32,000 Section 179 deduction limit.
Section 179 can generally be elected asset by asset but is limited by taxable business income at both the entity and owner levels. Bonus depreciation does not have the same limits and may create a net operating loss. Bonus depreciation generally applies automatically unless you elect out. An election out applies to the asset class, not individual assets. The best approach depends on your income, outlook, and state tax treatment.
Purchasing an asset is not enough; it generally must be ready and available for business use by December 31. Keep invoices, delivery confirmations, and installation records showing when it was placed in service.
4. Run Year-End Tax Projections
Tax projections let you estimate your liability and compare decisions before making them. Because income from S corporations, partnerships, and sole proprietorships typically flows through to the owner’s return, include:
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Year-to-date business income projected through December
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W-2 wages, investment income, and other household income
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The qualified business income deduction, if eligible
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One-time events, such as a business sale, capital gain, or stock option exercise
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Available deductions, credits, loss carryforwards, and estimated payments
Compare the tax you have already paid with your projected liability. To avoid an individual underpayment penalty, you generally need to pay at least 90% of your 2026 tax or 100% of your 2025 tax, whichever is less. The prior-year safe harbor rises to 110% when 2025 adjusted gross income exceeds $150,000, or $75,000 for married taxpayers filing separately.
Remember, fourth-quarter 2026 estimated payments are due January 15, 2027. If you receive W-2 wages, increasing your year-end withholding may help because withholding is generally treated as paid evenly throughout the year.
If you have significant income outside the business, read Tax Planning for High-Income Earners: 10 Moves to Review Before Year-End. Tax Planning for High-Income Earners: 10 Moves to Review Before Year-End.
5. Review Payroll and Employee Benefits
Make sure to address the following before December 31:
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Reconcile wages, withholdings, and deposits across payroll reports, the general ledger, and quarterly filings.
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Pay employee bonuses by December 31 if your cash-method business intends to deduct them in 2026.
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Identify taxable fringe benefits, such as personal use of a company vehicle or certain gift cards, that must be included on Forms W-2.
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Prepare for information-reporting deadlines. Because January 31, 2027, falls on a Sunday, 2026 Forms W-2 and 1099-NEC are generally due February 1, 2027.
To understand how your pay structure affects your taxes, read How to Pay Yourself as a Business Owner: Salary, Draws, Distributions & Tax Impact.
6. Identify Additional Deductions and Tax Credits
Deductions lower taxable income, while credits reduce your tax liability dollar for dollar. Review possible small business deductions for:
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Home office and vehicle expenses
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Self-employed health insurance premiums (generally deducted on owner’s individual tax return)
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Legal, accounting, and advisory fees
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Advertising, marketing, and business insurance
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Education related to your current trade or business
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Qualifying travel, meals, and supplies
Business expenses must generally be ordinary, necessary, and appropriately documented.
Credits and incentives to explore include:
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Research credit: May apply to qualifying product, process, or software-development activities.
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Retirement plan startup credits: May offset certain costs of establishing a plan or adding automatic enrollment.
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Energy-related incentives: Several provisions have accelerated termination or phaseout dates, making timing especially important.
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State and industry credits: States may offer incentives for hiring, research, investment, or activity in designated locations.
Under current law, the federal Work Opportunity Tax Credit does not apply to employees who begin work after December 31, 2025. Confirm all credit requirements with your advisor.
7. Prepare for State and Local Taxes
Depending on where you operate, your business may owe state or local income, franchise, gross receipts, sales and use, payroll, or unemployment taxes.
Pay close attention to nexus—the legal connection between a business and a state that creates a state filing obligation. Remote employees, sales that cross economic thresholds, out-of-state inventory, or on-site client work may create a nexus even without an office.
Also review whether your state grants a pass-through entity tax election. Its possible benefit depends on your state, income, ownership structure, and current federal rules. Election and payment deadlines vary.
8. Meet With Your Tax Advisor
A checklist will get you organized. Your tax advisor helps you turn that list into a strategy. Meet between October and December, so you have time to prepare and act.
Use the meeting to:
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Review your projected liability and year-end planning options
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Revisit your entity structure and owner compensation
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Coordinate business, retirement, investment, and estate decisions
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Determine whether you may need an extension, remembering that an extension provides more time to file—not more time to pay
If you are considering an S corporation election for 2027, raise it before year-end. For a calendar-year business, you generally must file the election by March 15, 2027, to take effect that year, although late-election relief may be available.
Frequently Asked Questions
What expenses can I write off for my small business?
You may generally deduct expenses that are ordinary and necessary for your business. Common examples include rent, office supplies, software, professional fees, advertising, insurance, vehicle costs, and 50% of most business meals. Keep detailed records showing the amount and business purpose. Additional rules apply to home offices, vehicles, travel, and meals.
How can a small business reduce taxable income before year-end?
Strategies to reduce taxable income include paying qualifying expenses, putting eligible equipment in service, contributing to retirement plans, and using available deductions or credits. Deferring income may also help if you expect a lower tax rate next year. The right approach depends on your projections, entity, cash flow, and goals.
Plan Ahead With LTax Consulting
Year-end planning should reflect your complete financial picture. Your entity structure, compensation, investments, retirement strategy, estate plan, and growth goals can all impact which strategies make sense.
LTax takes a consultative approach to tax planning for entrepreneurs and high-income business owners. Our team can help with entity structure, transaction planning, compensation, retirement plan design, state relocation analysis, and tax preparation.
Tax laws may be complex, but your next steps should be clear. Schedule a free consultation with an LTax team member today.
