If you operate your small business as a sole proprietorship or a single-member limited liability company (LLC) treated as a sole proprietorship for tax purposes, paying close attention to the individual federal income tax regime is critical. The same holds true if you operate your business as a partnership, S corporation, or LLC treated as a partnership or S corporation for tax purposes.
Why? Because, as you're no doubt aware, income generated by these noncorporate entities passes through to the personal federal income tax return of each owner. Assuming that's you, let's discuss some key tax-planning issues now that we've reached midyear.
Always keep an eye on your individual tax rate. The One Big Beautiful Bill Act (OBBBA), enacted in July 2025, made permanent the rates established under the Tax Cuts and Jobs Act of 2017. These rates — 10%, 12%, 22%, 24%, 32%, 35% and 37% — are generally considered favorable to individual taxpayers.
The thresholds that define tax brackets (the income ranges applicable to each tax rate) are subject to annual inflation adjustments. However, the adjustments for 2027 are expected to be relatively modest. If you expect to be in the same or lower income tax bracket for 2027 than you are for 2026, follow the traditional strategy of:
At a minimum, this approach will postpone part of your tax liability from 2026 until 2027 by reducing the amount of this year's passed-through business income.
On the other hand, if you expect to be in a higher tax bracket next year, take the opposite approach. As feasible, accelerate income into this year and postpone deductible expenditures until 2027. That way, more business income will be taxed at this year's lower rate instead of at next year's higher rate.
For sole proprietors and owners of pass-through entities, the Section 199A qualified business income (QBI) deduction is a big deal. Originally introduced under the TCJA, the OBBBA made it permanent, offering eligible taxpayers a deduction generally equal to 20% of QBI (not to exceed 20% of taxable income). The OBBBA also added a $400 minimum QBI deduction for eligible taxpayers with at least $1,000 of QBI, effective for tax years beginning after December 31, 2025.
QBI is generally defined as the net amount of qualified items of income, gain, deduction and loss that are effectively connected with the conduct of a U.S. business. The midpoint of the year is a good time to check into whether your small business may qualify for it and how much you might be able to deduct. Here are some finer points to keep in mind:
General phaseout. Above specified taxable income levels, the QBI deduction for income from an eligible business can't exceed the greater of 1) 50% of the amount of W-2 wages paid to employees by the qualified business during the tax year, or 2) the sum of 25% of W-2 wages plus 2.5% of the cost (not reduced by depreciation taken) of qualified property.
For 2026, these limitations generally apply when taxable income (calculated before any QBI deduction) exceeds $201,750 ($403,500 for married couples filing jointly). Also for 2026, these limitations are fully phased in once taxable income exceeds $276,750 ($553,500 for joint filers).
Special phaseout for certain businesses. For specified service trades and businesses (SSTBs), the QBI deduction phases out and is completely disallowed above specified taxable income levels. For 2026, the SSTB phaseout generally starts once taxable income (calculated before any QBI deduction) exceeds $201,750 ($403,500 for joint filers). The deduction phases out completely in 2026 once taxable income exceeds $276,750 ($553,500 for joint filers). SSTBs commonly include businesses that involve investment-type services and most professional practices (other than engineering and architecture).
Taxable income limitation. In addition to the aforementioned limitations, a taxpayer's allowable QBI deduction can't exceed 20% of the individual's taxable income, calculated before any QBI deduction and reduced by any net capital gain amount (defined as net long-term capital gains in excess of net short-term capital losses plus qualified dividends). Because of this restriction and others, it's important to plan your tax strategies carefully. Some moves you make (or don't make) can helpfully increase your allowable QBI deduction. But others — such as claiming substantial first-year depreciation deductions or making large deductible retirement plan contributions — can inadvertently reduce it.
Fun fact: You can also claim the QBI deduction for up to 20% of qualified dividends from a real estate investment trust and up to 20% of qualified income from publicly traded partnerships.
Midyear is an ideal time to step back and assess how your small business's projected income, deductions, credits and owner-level tax picture are shaping up. You should do so again at year end, but planning opportunities may be more limited then.
Because the rules can be complex — and one move can affect another — work closely with your tax advisor. With proactive planning now, you may be able to reduce surprises at tax time and position both yourself and your business for a stronger 2026.
Whether your small business is structured as a pass-through entity or a corporation, there may be other tax breaks worth considering. One example is the employer-provided child care credit. This break was significantly enhanced under the One Big Beautiful Bill Act (OBBBA).
In 2025, employers were allowed to claim a tax credit equal to 25% of qualified expenses for providing child care for employees, plus 10% of qualified resource and referral expenditures, up to $150,000. Beginning in 2026, the OBBBA permanently raised the 25% credit to 40%, up to $500,000 per year. For eligible small businesses, these amounts are 50% and up to $600,000, respectively.
So, if your small business qualifies, you can claim the maximum $600,000 credit if you incur at least $1.2 million in qualified child care expenditures. In addition, beginning in 2026, the OBBBA allowed small businesses to 1) pool their resources to provide child care for their employees, and 2) use third-party intermediaries to facilitate child care services.
An eligible small business is defined as one that has average annual gross receipts for the previous five years below an inflation-adjusted threshold. For 2026, that threshold is $32 million.
Important: The maximum dollar amount for this credit will be adjusted annually for inflation after 2026. (The additional 10% credit for resource and referral expenses will continue to be available.)
Get in touch today and find out how we can help you meet your objectives.
