Year-End Tax Planning 2026, Part 2: Five Client Conversations for Business Owners

Part 1 covered the five conversations to have with individual clients before December 31. This part is for the owners: clients with a sole proprietorship, partnership or S corporation on their return, and employees who hold company stock or options. The One Big Beautiful Bill Act (Public Law 119-21, signed July 4, 2025) made the 20% qualified business income deduction permanent, restored the full deduction for domestic research costs, and made 100% bonus depreciation permanent. Each of those gives an owner a decision to make this year, and the two equity items at the end have deadlines that do not wait for December.

As in Part 1, each section gives the rule, the 2026 figures, which clients to screen for, the tip, and a question to put to Planning mode to see that client's numbers.

01The §199A deduction: find the client's position first

The 20% deduction for qualified business income is now permanent, and everything about it depends on where the client's taxable income sits against a threshold. For 2026, Rev. Proc. 2025-32 sets the threshold at $201,750 for a single filer and $403,500 on a joint return. Below it, the deduction is 20% of qualified business income, with no wage or property test. Over the next $75,000 ($150,000 joint), the limits phase in. Above $276,750 ($553,500 joint) they apply in full: the deduction is capped at 50% of the W-2 wages the business pays (or 25% of wages plus 2.5% of the cost of its depreciable property), and a specified service business such as a law, accounting, consulting or medical practice gets nothing at all.

Three mechanics matter for planning. The deduction reduces taxable income, not adjusted gross income, so it does not help with any AGI-based limit, and it is available whether or not the client itemizes. Businesses under common ownership can be aggregated, which pools their wages and property for the limit, and a minority owner can aggregate on the strength of the group's ownership even without a majority stake of their own. And the wages that count are those paid by the business as the common law employer, which matters when staff are paid through a professional employer organization. The 2025 law also added a floor: a client with at least $1,000 of qualified business income from a business they materially participate in gets a deduction of at least $400.

Ask Planning mode: "S corporation owner, married filing jointly, consulting practice. Taxable income before the §199A deduction $430,000, qualified business income $300,000, W-2 wages paid by the business $90,000, no depreciable property. What is the 2026 §199A deduction, and what does a $26,500 deductible retirement contribution do to it?"

02Research costs: deductible again under §174A

From 2022 through 2024, a business could not deduct what it spent on research and development in the year it was spent. The 2017 law required those costs to be spread over five years, fifteen for research done abroad, and software development counted as research. The 2025 law reversed that for domestic research. New §174A allows a full deduction for domestic research or experimental costs paid in tax years beginning after December 31, 2024, with an election to amortize them over 60 months or longer instead. Software development is still research. Foreign research stays on the 15-year schedule.

The transition rules decide what happens to the balance still sitting on the books from 2022 through 2024. A business can deduct that remaining balance over one or two years starting with 2025, and a small business that meets the gross receipts test can instead amend the 2022 to 2024 returns and claim the deductions in the years the costs were paid. A business that also claims the §41 research credit still reduces its deduction by the credit under §280C.

Ask Planning mode: "Partnership with two equal partners, both married filing jointly. $600,000 of domestic software development cost in 2026 and a $400,000 unamortized balance of 2023 and 2024 research cost. Profit before research costs $900,000. Compare deducting everything in 2026 with amortizing the 2026 costs over 60 months and taking the catch-up over two years, for each partner's 2026 and 2027 tax."

03Depreciation elections: sometimes take less, on purpose

Property acquired after January 19, 2025 qualifies for 100% bonus depreciation under §168(k), permanently, and §179 expensing covers up to $2,560,000 of purchases in 2026 before phasing out above $4,090,000. The usual year-end advice follows from that: buy and place the asset in service by December 31 and deduct all of it. This section is about the opposite case, because a deduction is only worth what it offsets.

The Code gives an owner three ways to slow the deduction down. An election out of bonus depreciation under §168(k)(7) applies to a whole class of property placed in service in the year, so a client can keep 100% on seven-year equipment and elect out for five-year property. The alternative depreciation system election under §168(g)(7) goes further, spreading the cost straight-line over a longer life; it is also class-wide, except that for nonresidential and residential rental buildings it is made building by building. And the 150% declining balance election under §168(b) is the method the alternative minimum tax uses, so choosing it for regular tax removes a separate AMT depreciation calculation; it is a bookkeeping simplification, not a saving. All three elections are irrevocable. Some property has no choice and must use ADS: property used mostly outside the United States, property financed with tax-exempt bonds, and property leased to a tax-exempt entity.

The reason to slow down is the excess business loss limit in §461(l). For 2026, an owner can use at most $256,000 of net business loss ($512,000 on a joint return) against other income such as wages, interest or a spouse's salary. The excess is not lost: it becomes a net operating loss carried to later years. But it cannot shelter this year's other income, and an NOL can offset only 80% of a future year's taxable income. A large bonus deduction in a year with modest profit creates exactly that trapped loss.

Ask Planning mode: "Sole proprietor, single, $900,000 of five-year equipment placed in service in December 2026. Business profit before depreciation $350,000, other income $150,000. Compare 100% bonus depreciation with electing out and using regular 200% declining balance, showing the excess business loss, the NOL carried forward, and the §199A deduction in each case."

04The §83(b) election: a 30-day clock, not a December one

Restricted stock is taxed as compensation when it vests, at its value on each vesting date. An §83(b) election changes that: the client reports the stock's value at grant as ordinary income now, and everything after that is capital gain when the shares are sold. For a founder or early employee of a company that is still worth little, the income reported at grant is small or zero, and the election converts years of growth from ordinary income into long-term capital gain. The capital gain holding period starts at grant, and for a C corporation that qualifies, so does the five-year clock for the §1202 small business stock exclusion.

The deadline is the whole conversation. Under §83(b)(2) the election must be filed within 30 days of the transfer, there is no extension, and the IRS cannot grant relief for a late one. It goes to the IRS on Form 15620 or an equivalent statement, with a copy to the employer. The risk runs the other way too: if the client leaves before vesting and forfeits the shares, no deduction is allowed for the tax already paid, so the election fits a cheap grant, not an expensive one.

Ask Planning mode: "Client received 200,000 shares of restricted founder stock at $0.10 a share, vesting over four years, and expects the shares to be worth $5 at the first vesting date. Compare ordinary income with and without an §83(b) election, and the tax on a sale of all shares in year five at $20 a share."

05Incentive stock options: the December sell-or-hold decision

Incentive stock options get capital gain treatment on the whole gain from the exercise price, but only if the shares are held two years from grant and one year from exercise under §422(a). Sell earlier and it is a disqualifying disposition: the spread at exercise becomes ordinary income, and only growth after exercise is capital gain. So the sale date sets the character of the income, and a client who exercised this year is choosing between ordinary income now and capital gain later.

The complication is the alternative minimum tax. Regular tax ignores the spread when an ISO is exercised, but §56(b)(3) counts it for AMT. A client who exercised in 2026 and still holds the shares on December 31 has an AMT adjustment equal to the spread at exercise, whether or not the stock has since fallen. For 2026 the AMT exemption is $90,100 for a single filer and $140,200 on a joint return, phasing out at 50 cents per dollar of alternative minimum taxable income above $500,000 and $1,000,000, and the AMT rate is 26%, or 28% above $244,500. AMT paid because of an ISO exercise generates a credit under §53 that comes back in later years, but the cash goes out in April.

Ask Planning mode: "Client, single, wages $220,000, exercised incentive stock options in March 2026: 10,000 shares at a $5 exercise price when the stock was worth $30, now trading at $24, still held. What is her 2026 alternative minimum tax if she holds, and what changes if she sells 4,000 shares before December 31?"

06Running the review with Planning mode

In the Partnertax AI Tax Assistant, turn Planning on with the toggle beside the message box (it is in beta), give the client's facts, and ask the question. The answer calculates federal tax and savings from those facts, and lists the source behind each figure under the answer so you can check which rule it applied. Planning mode models individuals, pass-through entities and C corporations, so the owner's return and the business can be run together.

When an answer is the recommendation, Save plan turns it into a plan with a PDF to send the client. Each later save adds a version, so the December update sits next to the October one, and every plan opens from My plans. Running the same question for the next client means picking that client and asking again, without re-entering their details.

Part 1 covers individual clients: the standard deduction, the senior deduction, charitable giving, the SALT cap and retirement contributions. The choice between a C corporation and a pass-through, which deserves more than a section, gets an article of its own.