What's changing in tax law for 2026: updates SMBs should know

Tax laws change every year. Inflation adjustments. Expiring provisions. New regulations. Planning with last year's numbers is planning to fail.

A healthcare practice budgets for retirement using 2025 limits. The 2026 limits increased by $3,500. Money left on the table. A creative agency assumes 100 percent bonus depreciation. The rate dropped to 40 percent. Deductions slashed. A consulting firm discovers new FinCEN beneficial ownership reporting carries $500 daily penalties. Costs mounting.

Professional service firms need to understand nine critical tax law changes for 2026: inflation-adjusted standard deductions and brackets, qualified business income deduction updates, reduced bonus depreciation, increased retirement limits, business expense deduction changes including R&D capitalization requirements, new FinCEN beneficial ownership reporting obligations, state tax law variations, upcoming federal tax provision expirations, and preparation strategies.

Standard deduction and tax bracket adjustments: inflation relief for 2026

Inflation adjustments increase standard deductions and bracket thresholds annually, affecting individual tax liability and estimated payments for pass-through entity owners.

2026 standard deduction and bracket increases

Standard deductions increase approximately 2.8 percent for 2026. Single: $15,000 (up from $14,600). Married filing jointly: $30,000 (up from $29,200). Head of household: $22,500 (up from $21,900).

Tax bracket thresholds adjust upward similarly. For single filers, the 24 percent bracket begins at $103,350 (up from $100,525). For married filing jointly, $206,700 (up from $201,050).

The math: A married couple gains $800 additional standard deduction, reducing federal tax by $88 to $296 depending on marginal rate. Modest but real.

Law firm partners, medical practice physicians, creative agency principals, IT services firm owners, nonprofit executives with consulting income all benefit. The benefits are modest. Do not restructure your business based on $88 to $296 in tax savings.

Qualified business income deduction updates: thresholds and limitations

The QBI deduction allows eligible pass-through owners to deduct up to 20 percent of qualified business income. If you qualify. If your income stays below phase-out thresholds. If your business is not a specified service trade or business.

2026 QBI phase-out thresholds and SSTB limitations

For 2026, QBI phase-out thresholds increase to approximately $197,300 for single filers and $394,600 for married filing jointly.

Below these thresholds? Full 20 percent deduction. Above these thresholds? Service businesses face complete phase-out over $100,000 of income (married filing jointly) or $50,000 (single).

SSTBs include: Healthcare, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, and any business where principal asset is reputation or skill of employees or owners. Most professional service firms qualify.

A law firm partner with $450,000 taxable income receives zero QBI deduction. A medical practice physician with $375,000 taxable income receives partial deduction during phase-out. At $375,000, the physician loses thousands in deductions compared to someone at $394,600.

Planning strategies

Owners near thresholds have options. Increase retirement contributions to reduce taxable income below thresholds. Time income and deductions to manage taxable income year by year.

A consulting firm owner at $400,000 taxable income can make $25,000 in additional Solo 401(k) contributions, dropping taxable income to $375,000 and saving approximately $5,000 in QBI deduction that would otherwise phase out.

Depreciation changes: bonus depreciation drops to 40 percent

Bonus depreciation is dying slowly. The Tax Cuts and Jobs Act set a phase-down schedule. We are watching it happen.

40 percent bonus depreciation and section 179 alternative

For property placed in service during 2026, bonus depreciation rate is 40 percent. Down from 60 percent in 2025. Down from 100 percent in 2023.

A law firm purchasing $100,000 in equipment can immediately expense $40,000 through bonus depreciation. The remaining $60,000 depreciates over five to seven years. In 2023? Same purchase generated $100,000 immediate deduction. Now? $40,000. The difference is $60,000 in deductions deferred to future years.

Section 179 provides an alternative. For 2026, Section 179 allows immediate expensing up to approximately $1,250,000. For most professional service firms, Section 179 beats 40 percent bonus depreciation. A healthcare practice purchasing $200,000 in medical equipment can expense the full amount under Section 179, compared to only $80,000 under bonus depreciation.

Equipment purchase timing

Equipment purchased in December 2025 gets 60 percent bonus depreciation. Same equipment in January 2026 gets 40 percent. In 2027? 20 percent. In 2028? Zero.

Professional service firms planning significant purchases should evaluate acceleration into 2025. Workstations. Servers. Medical equipment. Production equipment. The depreciation math might justify buying now.

Retirement contribution limits: increased savings opportunities

Retirement contribution limits increase for 2026. More tax-deferred savings. More deductions.

401(k), IRA, and enhanced catch-up contributions

For 2026, 401(k) and 403(b) limits increase to approximately $23,500 (up from $23,000). IRA limits increase to approximately $7,500 (up from $7,000). An extra $500 saves $110 to $185 in federal tax depending on marginal rate.

The real opportunity: enhanced catch-up contributions for ages 60-63. New SECURE 2.0 Act provisions allow individuals ages 60, 61, 62, or 63 to contribute the greater of $10,000 or 150 percent of regular catch-up.

A 62-year-old law firm partner can contribute $23,500 (standard) plus $10,000 (enhanced catch-up) for total $33,500 in 2026. At 35 percent marginal rate, this saves $11,725 in federal tax.

SEP IRA and Solo 401(k) overall limits increase to approximately $70,000 (up from $69,000). Self-employed professionals can contribute up to 25 percent of compensation as employer contributions.

Business expense deduction changes: R&D capitalization and more

Business expense deduction rules evolved. Some changes are ongoing from prior years. Others are new for 2026. All affect professional service firm tax planning.

Meal deductions and interest limitations

Business meals are 50 percent deductible with documented business purpose. Entertainment remains non-deductible. Client lunch discussing a project? 50 percent deductible. Baseball game with clients? Not deductible even if you discuss business.

Section 163(j) limits interest expense deductions to 30 percent of adjusted taxable income for businesses exceeding approximately $32 million in gross receipts. Most professional service firms never reach this threshold.

R&D expense capitalization status and requirements

This is the big change affecting technology-focused firms.

Under Section 174, taxpayers must capitalize and amortize research and experimental expenditures over five years (15 years for foreign research). This requirement took effect for tax years beginning after December 31, 2021. It continues in 2026 unless Congress repeals or modifies it.

The impact hits hard. A software development firm with $500,000 annual R&D expenses can only deduct $100,000 in the current year (one-fifth). The remaining $400,000 gets deferred to future years. This reduces current-year deductions by $400,000, increases taxable income by $400,000, and increases tax by $88,000 to $148,000 depending on entity structure and owner rates.

Who this affects: Technology firms developing software. IT services firms building proprietary tools. Healthcare technology companies creating clinical applications. Consulting firms developing intellectual property. Creative agencies building platforms.

What qualifies as R&D: Software development with technological uncertainty. Experimental processes testing new approaches. New product development requiring experimentation. Prototype creation. Process improvement involving technical innovation.

Documentation requirements: Documentation proving technological uncertainty (you did not know if the approach would work), experimentation process (you tested multiple approaches), and business purpose (the development serves a business need) is essential.

Many firms miss qualifying expenses because documentation is inadequate. Software developers who think they are just coding might actually be conducting qualifying research if technological uncertainty exists. The difference between "coding" and "R&D" often comes down to documentation quality.

Legislative proposals to repeal R&D capitalization requirements continue in Congress. Multiple bills have been introduced. None have passed. Firms should monitor legislation. If repeal passes, it will likely apply retroactively, allowing amended returns to claim immediate deductions.

Until then, firms conducting R&D should work with tax professionals to identify qualifying activities, document them properly, and calculate deferred deduction schedules accurately.

FinCEN beneficial ownership information reporting: new compliance requirement

This is the compliance surprise of 2024 catching many firms off guard in 2026.

The Financial Crimes Enforcement Network requires most entities to file beneficial ownership information reports under the Corporate Transparency Act. New federal reporting. New deadlines. New penalties.

Who must file BOI reports and exemptions

Nearly all corporations, LLCs, and other entities created by state filing must file. Law firms. Medical practices. Consulting firms. Creative agencies. IT services companies. Accounting firms. Nonprofit entities formed as corporations or LLCs.

Exemptions: Publicly traded companies. Banks. Insurance companies. Investment companies registered with SEC. Entities with more than 20 full-time employees and $5 million in gross receipts. Accounting firms. Tax-exempt nonprofits.

Most professional service firms with fewer than 20 employees do not qualify for exemptions. You must file.

Required information and deadlines

BOI reports must identify each beneficial owner: any individual who directly or indirectly owns or controls at least 25 percent of ownership interests or exercises substantial control.

For a two-owner consulting firm with 50-50 ownership? Both owners are beneficial owners. For a three-partner law firm? All three partners are beneficial owners.

Required information: Full legal name. Date of birth. Residential address. Identification number from driver license, passport, or government-issued ID. Copy of identification document.

Deadlines: Entities formed before January 1, 2024 had until January 1, 2025 (now past). Entities formed during 2024 had 90 days from formation. Entities formed on or after January 1, 2025 have 30 days from formation.

Entities must file updated reports within 30 days of any change. Owner moves? File within 30 days. Ownership changes? File within 30 days. New driver license? File within 30 days.

Penalties and industry considerations

Willful failure to file carries civil penalties up to $500 per day. A firm missing deadline by 60 days owes $30,000. Criminal penalties include fines up to $10,000 and imprisonment up to two years.

Law firms, healthcare practices, and accounting firms handling confidential information face sensitivity around collecting and storing partner identification documents.

State tax law changes: multi-state considerations

State tax laws do not automatically follow federal changes. Each state decides which federal provisions to adopt. Professional service firms operating across multiple states need state-specific planning.

States adopt federal changes through conformity provisions. Some conform to Internal Revenue Code as of a specific date (static). Others conform to current IRC (rolling). Standard deduction adjustments typically flow through automatically. QBI deduction treatment varies dramatically by state.

Many states enacted pass-through entity tax (PTET) elections as workarounds to the $10,000 federal SALT deduction cap. PTET allows partnerships and S-corporations to pay state income tax at entity level, creating federal business expense deduction while providing offsetting state credits to owners. A consulting firm in a high-tax state can save $2,000 to $5,000 annually through PTET election.

Tax law expiration calendar: major provisions ending soon

Several significant tax provisions expire at year-end 2025. Congress may extend them. Congress may let them expire. Nobody knows until it happens.

The 20 percent QBI deduction expires December 31, 2025 unless Congress extends it. For a consulting firm owner with $300,000 QBI, loss of this deduction increases tax by approximately $10,000 to $14,800.

Individual income tax rates under the Tax Cuts and Jobs Act expire December 31, 2025. If expired, rates revert to pre-2018 levels. Top rate returns to 39.6 percent (from 37 percent). Pass-through owners face higher rates. The combination of QBI deduction loss and rate increases could increase federal tax by 15 to 25 percent for many professional service firm owners.

Bonus depreciation continues phasing down: 40 percent in 2026, 20 percent in 2027, zero percent in 2028.

How to prepare for these changes: action steps

Preparation requires specific actions across multiple planning dimensions.

Many of these tax changes intersect directly with year-end compliance tasks like information collection, reporting deadlines, and documentation reviews. If you want a structured way to make sure nothing slips through the cracks, this Small business tax compliance checklist for year-end walks through what to review before closing the books.

Recalculate 2026 estimated tax obligations using updated standard deductions, bracket thresholds, and QBI phase-out limits. Adjust quarterly payments to avoid underpayment penalties.

Maximize increased retirement contribution limits where cash flow allows. Firm owners ages 60-63 should take advantage of enhanced $10,000 catch-up contributions. The tax savings are substantial.

Evaluate equipment purchase timing considering reduced bonus depreciation. Significant purchases might justify acceleration into late 2025 for 60 percent versus 40 percent in 2026.

Review entity formation dates and BOI filing obligations. Entities with missed January 1, 2025 deadlines should file immediately to minimize $500 daily penalties. Entities formed in 2025 or 2026 should file within 30-day deadlines. Establish systems to monitor ownership changes requiring updated reports.

Complex tax law changes, expiring provisions, and new reporting requirements exceed most business owner capacity. Engage qualified tax professionals to model scenarios, calculate optimal strategies, and ensure compliance. Professional service firms with $500,000 or more annual revenue, multiple owners, multi-state operations, or complex ownership particularly benefit. The cost of professional help (typically $2,000 to $8,000) is far less than the cost of missed opportunities or non-compliance penalties.

Conclusion: proactive planning captures opportunities

Tax law changes create both risks and opportunities. Firms planning with outdated assumptions miss opportunities and incur penalties. Firms monitoring changes proactively capture expanded contribution limits, optimize equipment timing, maintain compliance, and model scenarios for expiring provisions.

Nine categories require attention. Standard deductions provide modest individual relief. QBI thresholds affect pass-through owners significantly. Reduced bonus depreciation alters timing decisions. Increased retirement limits expand deferral capacity. R&D capitalization changes cash flow for technology firms. FinCEN BOI reporting creates new obligations with severe penalties. State variations require multi-state analysis. Expiring provisions threaten major deduction losses. Preparation captures benefits while avoiding risks.

Start now. Review 2026 estimated tax position. Maximize retirement contributions. Evaluate equipment timing. File BOI reports by deadlines. Consult qualified tax professionals on complex scenarios.

Our team provides comprehensive tax planning for professional service firms, including entity structure optimization, retirement strategies, equipment depreciation planning, R&D expense documentation, multi-state compliance, and FinCEN BOI reporting. Schedule a tax planning consultation.