4 Year-end Tax Planning Steps Businesses Can Take Before 2026

The passage of P.L. 119-21, also known as the “One Big Beautiful Bill Act,” changed the tax landscape and created new opportunities for year-end planning. As 2025 comes to a close, we recommend assessing potential steps you can take before the end of the year to reduce your tax bill.

Year-end tax decisions can have a significant impact on your business now and in the years to come. Work with your tax advisor to see which of these tips and strategies may benefit your unique tax position.

1.) Understand Your Tax Baseline

Your tax advisor can prepare a pro forma 2025 tax return to provide a more comprehensive projection of your current tax situation heading into the new year. With a baseline in hand, you will have a better view of how your position may change if you incur additional deductions or realize more income — and which tax planning strategies will be advantageous to implement before year-end.

2.) Implement Cost Recovery Strategies for Capital Assets

The 2025 tax reform introduced a series of new or enhanced business deductions, one of the most notable changes for business owners to result from P.L. 119-21.

Bonus Depreciation and Section 179 Expensing

With 100% bonus depreciation restored, qualified property acquired and placed in service after January 19, 2025, is now eligible for full expensing. Taxpayers can alternatively elect to claim 40% bonus depreciation on these assets placed in service in 2025.

Additionally, Section 179 expensing doubled for tax years beginning in 2025, allowing small to mid-sized businesses to immediately expense up to $2.5M, with the deduction phasing out for each dollar in equipment purchases over a $4M threshold.

R&E Expensing

Section 174A restores full expensing of domestic research and experimental (R&E) costs incurred in tax years beginning after December 31, 2024. With the passage of P.L. 119-21, it is now optional to capitalize and amortize your domestic R&E costs over five or 10 years.

Small businesses ($31M or less in average annual gross receipts) can retroactively deduct the balance of unamortized costs capitalized in 2022 – 2024 via amended returns. All businesses have the option of deducting these capitalized costs in their entirety in 2025, or ratably over the two-year period from 2025 – 2026. Alternatively, the costs can continue to be amortized pursuant to their current schedules.

However, all businesses are still required to capitalize foreign R&E expenditures and amortize them over 15 years.

Tax planning strategies for R&E expenditures include:

• Utilizing a Section 41 R&D tax credit study
• Utilizing Sections 174 and 174A study to identify R&E expenditures, including software development costs
• Selecting an option for the time period to amortize prior year costs
• Identifying if the company is a small business taxpayer, and if so:
  • Take advantage of retroactive application election to deduct R&E costs in prior years
  • File an election statement with amended returns on or before July 6, 2026

De Minimis Expensing Election

Under the Tangible Property Regulations, the de minimis safe harbor election allows for certain small-dollar expenditures for tangible property to be immediately deducted. Work with your tax advisor to be sure you meet the specific criteria for this election, as certain conditions must be satisfied.

Tax Planning for Faster Cost Recovery 

Cost segregation studies can accelerate depreciation for short-lived assets in real property projects. For faster cost recovery, businesses can also:

• Review asset lives and dates placed in service
• Identify deductible repair expenditures
• Claim deductions for partial dispositions
• Deduct non-incidental materials and supplies
• Maximize use of de minimis expensing election 

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3.) Create a Strategy To Lower Taxes

There are numerous strategies you can take to effectively lower taxes for your business. Work with your tax advisor to determine which action steps are most suitable for your specific situation, including:

• Accelerating charitable deductions
• Selling depressed value, non-core assets
• Abandoning worthless investments and assets
• Decelerating revenues by slowing invoicing and collections at year-end
• Adopting the 12-month rule for prepaid expenses and intangible assets
• Deferring income from advanced payments
• Delaying cancelation of debt transactions until 2026
• Increasing deductible expenses and limiting nondeductible expenses, such as meals, employee parking and entertainment
• Adopting a defined benefit plan

Claiming tax credits will also reduce your tax liability when filing your return. Beneficial tax credits include:

• Research and Development (R&D) Tax Credit
• Work Opportunity Tax Credit (WOTC)
• Employer-Provided Child Care Credit
• Historic Rehabilitation Credit
• Low-Income Housing Credit (LIHTC)
• New Markets Tax Credit (NMTC)

Review the tax credits available to your business and work with an advisor to check that you meet the necessary criteria.

Retirement Plans

Business owners should establish and fund a qualified retirement plan before the extended due date of the 2025 income tax return. In doing so, you can deduct contributions made to the retirement plan for 2025, earn a tax credit up to $5,000 for the cost of setting up and administering the plan.

Additionally, many small employers can earn a tax credit up to $1,000 per employee for making a plan contribution for employees who make less than $100,000. You can combine retirement plans for larger deductions. For example, combining a 401K with a profit-sharing plan and a defined benefit plan can yield bigger tax deductions.

The 2022 SECURE 2.0 Act also provides numerous retirement provisions to be aware of, including:

• Roth catch-up contributions for high earners
• Roth accounts in qualified plans are now exempt from lifetime RMDs
• Pension linked emergency savings accounts
• Employer matching contributions based on student loan payments
• Plan amendment deadline extended to December 31, 2026

For efficient year-end tax planning, meet with your plan advisors to address optional and required changes to plan documents.

Reporting Compensation and Payments

To accurately report compensation and payments, it’s essential to understand changes in reporting requirements and which forms apply to different situations. Review the following:

• Form 1099-MISC/NEC: A $600 reporting threshold for 2025 payments and a $2,000 reporting threshold for 2026 payments.
• Form 1099-K: For 2025 payments, P.L. 119-21 reinstated the prior threshold of $20,000 and 20 transactions.
• Deduction for Tip Income: No required Form W-2 reporting for 2025 tips under the Act. Prepare for changes to withholding, identifying qualifying tips and job codes in 2026.
• Deduction for Overtime Pay: No required Form W-2 reporting for 2025 overtime pay under the Act. Prepare for changes to withholding, identifying and tracking qualifying overtime in 2026.

4.) Consider Your Entity Structure

The end of the year is an ideal time to reevaluate your business’s structure and make any needed changes. Sole proprietorships are common, with one owner managing the business. Those with multiple owners may operate as a pass-through entity (PTE), such as an S corporation or LLC, or as a C corporation.

PTE status has the potential to lower your taxes, since qualified PTEs can elect to pay a PTE tax at the entity level on behalf of the owner’s share of qualified net income. This generates a tax deduction on the PTE’s federal return and reduces the taxable income reported on the owner’s K-1.

PTEs have their own set of year-end tax planning considerations, including:

• State PTE elections
• Aggregation elections for group activities
• Loans and capital contributions before year-end to boost owner basis
• Obstacles, including stock and debt basis limitation, at-risk limitation, passive activity loss limitation and excess business loss limitation

Additionally, the 2025 tax reform enhanced Section 1202 gain exclusion from the taxable sale of C corporation stock, making it pertinent to consider the value of Section 1202 gain exclusion coupled with C corporation taxation at the company level and, again, upon dividend to shareholders. To evaluate the best entity structure for your business, you can ask yourself questions such as:

• What is the five-year plan for the company?
• How will future growth be funded?
• Have we considered available tax credits and incentives?
• Where is the company located and where will it expand?
• Who owns the company? If it is a family business, is there a succession plan? 

Your tax advisor can help you evaluate these variables and determine the entity status that best suits your company.

Your Guide Forward

Year-end tax planning can be complex, especially with the introduction of new and enhanced tax provisions. Our team of experienced tax professionals can answer specific questions you may have about your business’s unique tax position and how to plan for the future. Connect with a Cherry Bekaert advisor today to explore year-end planning strategies that will benefit your company.

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