11 Tax Strategies for Business Owners in 2026, and Why $65,375 of Deductions Saves $12,552

The 2025 tax law, P.L. 119-21, made several of these strategies larger. Most of them are business deductions, though, and a business deduction also shrinks the 20% qualified business income deduction. For an owner below the income threshold, each dollar deducted lowers taxable income by 80 cents.

In the example in section 2, an S corporation owner moves $65,375 through three strategies and saves $12,552 of federal tax. At a 24% bracket the usual math says $15,690.

Below are eleven strategies in the order an owner tends to meet them, each with who it fits, the number that decides it, the usual mistake and the full post.

1. An S corporation salary sets up everything after it

A sole proprietor pays self-employment tax on their profit: 12.4% for Social Security up to the wage base, and 2.9% for Medicare on all of it. An S corporation owner pays the same rates only on a salary, and the profit left after it passes through on a K-1 with no payroll tax. It fits an owner whose profit runs well above what a market salary for their job would be.

On $150,000 of 2026 profit and a $70,000 salary, payroll tax falls by $10,484. A single filer with no other income saves a net $7,032 of income tax, Social Security and Medicare once the smaller QBI deduction is counted, before unemployment tax and the cost of running payroll. The trap is the salary itself. The IRS says an S corporation must pay reasonable compensation to a shareholder who works in it before taking distributions, and it can reclassify a distribution as wages. The full math is in S-Corp Salary: Why a $10,484 Payroll Tax Saving Shrinks to $7,032.

2. The QBI deduction takes a cut of every strategy below it

Owners of sole proprietorships, partnerships and S corporations deduct up to 20% of qualified business income under section 199A, which P.L. 119-21 made permanent. Below $403,500 of taxable income on a joint return ($201,750 for most other filers), the deduction is 20% of that income, capped at 20% of taxable income. Above that, wage and property limits phase in over the next $150,000 ($75,000), and a specified service business such as consulting or law loses it entirely at the top, per Rev. Proc. 2025-32.

Qualified business income is the net of the business's income and deductions, and section 199A(c)(4) leaves out an S corporation owner's own wages. So rent the company pays you, a reimbursement, a retirement contribution or a depreciation deduction each lowers the 20% deduction too. Here is a married S corporation owner, not in a service business, with a $150,000 salary, $250,000 of profit on the K-1 and the $32,200 standard deduction. Federal income tax only.

Tax falls by $12,552. Taxable income dropped $52,300, which is the $65,375 less the $13,075 of QBI deduction it cost, and $52,300 at 24% is $12,552. Both returns sit in the 24% bracket ($211,400 to $403,550 joint) and under the $403,500 threshold, so no wage limit applies. The salary, and so payroll tax, stays the same.

Who qualifies and how the limits work are covered in QBI Deduction: Who Qualifies and How to Claim It.

3. A PTET election rescues state tax the SALT cap blocks

The 2026 cap on deducting state and local tax is $40,400 under section 164(b)(7), cut by 30% of modified AGI above $505,000 and never below $10,000. At about $606,333 an owner is back to $10,000. A partnership or S corporation in a state that offers a pass-through entity tax can pay the state tax itself and deduct it in full, which Notice 2020-75 keeps outside the owner's cap.

In the example in our PTET post, $25,000 of entity-level tax cuts a couple's federal tax by $7,000, not the $8,750 a 35% bracket implies, because the payment also shrinks QBI. The election does little for an owner who is under the cap already, or who lives in a state that will not credit tax the entity paid. Details and the California and New York calendars are in PTET Election: Why $25,000 of State Tax Saves $7,000, Not $8,750.

4. Bonus depreciation is back to 100%

P.L. 119-21 restored 100% bonus depreciation under section 168(k) for property acquired after January 19, 2025, with no phase-down. Section 179 is the other route, capped for 2026 at $2,560,000 and reduced once purchases pass $4,090,000, per the same revenue procedure.

Bonus can push a business into a loss, but an individual's net business loss can offset no more than $512,000 of other income on a 2026 joint return ($256,000 single). Owners who rent equipment out hit a second problem, because section 179 has a lessor test and bonus does not. Why a $240,000 Rental Excavator Usually Gets Bonus, Not Section 179 walks through it. Building interiors are covered in Understanding Qualified Improvement Property (QIP) and Its Impact on Your Tax Strategy.

5. Hiring your kids works best outside an S corporation

Wages for a child's real work are deductible, and once a dependent child earns $15,650, their 2026 standard deduction reaches the full $16,100 and absorbs the pay. The IRS family employees page exempts a child under 18 from Social Security and Medicare only when the employer is a parent's sole proprietorship or a partnership in which each partner is a parent. A sole proprietor on $150,000 of profit who pays a 16-year-old $16,100 saves the family $3,711.

In an S corporation, though, the child's pay carries payroll tax from the first dollar, so only the income shift survives. The wage also has to match the work. See Hiring Your Kids: How a $16,100 Paycheck Saves a Family $3,711.

6. Your home can carry two deductions

The Augusta rule

Under section 280A(g), a home rented for less than 15 days in the year produces rent you do not report. An S corporation, partnership or C corporation can rent your home for meetings and deduct the rent. A sole proprietor cannot, because the business and the owner are the same taxpayer. On $24,000 of rent, an S corporation owner in the 24% bracket saves $4,608.

The company's deduction needs a rate an outside venue would charge and records of real meetings, and short-term rental nights count toward the same 14 days. More in Augusta Rule: Why $24,000 of Home Rent Saves $4,608, Not $5,760.

The home office

Space used regularly and exclusively for the business qualifies. The simplified method in Rev. Proc. 2013-13 pays $5 a square foot on up to 300 square feet, so it never passes $1,500. A Schedule C owner with a mortgage often does better on Form 8829.

S corporation owners get this wrong. As employees, they cannot deduct a home office personally at all, because section 67(h) now bars miscellaneous itemized deductions permanently. The company has to reimburse the cost under an accountable plan. Section 280A(c)(1) adds a test for employees: on top of regular, exclusive use, the office has to be there for the employer's convenience. The full rules are in Home Office Deduction: Why Form 8829 Beats the $1,500 Simplified Method by $3,657.

7. Retirement plans take the largest deductions

The solo 401(k)

An owner with no employees can put up to $72,000 into a solo 401(k) for 2026, of which $24,500 can be elective deferrals, per Notice 2025-67. The employer share for an S corporation owner tops out at 25% of W-2 pay, so a modest salary caps it. After-tax contributions converted to Roth can fill the gap, which is $22,500 on a $100,000 salary, but only if the plan document allows both steps. See Solo 401(k) Mega Backdoor Roth: Filling the Last $22,500 of a $72,000 Limit.

The cash balance plan

A cash balance plan is a pension, limited by the benefit it pays rather than by a contribution cap. Section 415(b) caps the annual benefit at $290,000 for 2026 or 100% of average pay for the owner's highest three years, whichever is less. For an owner in their 50s with steady profit, that can mean $117,500 more than a 401(k) takes, as in the example in our cash balance post.

Once adopted, the plan has to be funded. The actuary sets a minimum every year, and section 4971 charges 10% of any unpaid minimum. Read Cash Balance Plans: $117,500 More Than a 401(k) Allows, Funded Every Year before signing one.

8. Research spending is deductible in the year you pay it

Since 2025, section 174A lets a business deduct domestic research and software development costs immediately, ending the five-year amortization required from 2022 through 2024. Foreign research is still amortized over 15 years. On top of the deduction, the research credit under section 41 can go against payroll tax, up to $500,000 a year, for a business with under $5 million of gross receipts and no receipts before the last five years.

The trap is a box on Form 6765. For a C corporation losing money, the reduced-credit election gives up cash now for a loss it may never use. The example in R&D Credit Under Section 174A: Why a Startup Should Take the Full $109,200 Against Payroll shows the $22,932 it costs.

9. QSBS pays at exit, and only after five years in full

For C corporation stock acquired after July 4, 2025, section 1202 excludes 50% of the gain at three years, 75% at four and 100% at five, up to $15 million per issuer or 10 times basis. The company's gross assets must stay at or under $75 million through the issuance. Service firms such as consulting, law and health care cannot issue it.

The trap is selling early. In year 4, the quarter of capped gain that is not excluded is taxed at up to 28%, plus 3.8% net investment income tax; in year 5 it is fully excluded. At today's $15 million cap, with basis under $1.5 million, a top-bracket seller's year-4 sale of a $20 million gain costs $1,192,500 more than waiting. The cap rises with inflation for tax years after 2026, so the dollar gap will be somewhat larger. See New QSBS Rules: A Year-4 Sale Costs $1,192,500 More Than Waiting.

10. What to do before December 31

• Find your QBI position. Estimate 2026 taxable income against $403,500 joint or $201,750 single, so you know whether each deduction costs you 20% of itself.
• Place equipment in service by year end. The deduction lands in the year the property is placed in service, so a January delivery moves it to 2027.
• Run payroll for the kids and for yourself. Wages count in the year paid, and an S corporation owner's 401(k) deferral needs a paycheck in 2026.
• Paper the home. Meeting records and venue quotes for the Augusta rule, and an accountable plan before the books close.
• Price the pension early. A cash balance plan for 2026 can be adopted as late as the extended return date, but the actuary needs time.

Our tax planning work starts by running your return with and without each strategy that fits, QBI give-back included, before anyone changes payroll or signs a plan. Book a call with your 2025 return, the business's year-to-date profit and payroll, and a list of what you bought or plan to buy this year. With nine weeks left in 2026, anything that needs a paycheck or a delivery goes first.

General information for owner-operators, not tax advice. Thresholds change and state treatment varies; confirm current requirements for your own facts before acting.