Year-end tax planning for small business

Tax planning for small business happens in a short window: most of the moves that change this year’s tax have to be done by December 31, and every one of them starts with a question the preparer asks first. What is the profit so far? An owner who asks in December whether to buy the truck now gets that question back, and the answer has to come from the books, not from the bank balance.

This post lists the year-end moves a calendar-year business can make before December 31, 2026, what each one does, its deadline, which businesses it suits, and the figure the books have to supply before anyone can decide. The tax rules are cited to the IRS. Ledgerbrook keeps books and does not file returns, so whether any move is right for your business is a decision for your CPA or enrolled agent, made with your numbers in front of them.

Start with the profit number

Every year-end decision is a comparison against one figure: taxable profit for the year. The books get you most of the way there by early December.

Projected profit = Year-to-date net income through November 30 + December estimate + adjustments the books are still missing

Which expenses count toward that figure at all, and the record each needs, is in small business tax deductions.

The adjustments are the items a bank feed does not show: depreciation, accrued wages, receivables and payables on an accrual file, and owner expenses paid from a personal card. A profit and loss run on November 30 from unreconciled accounts is a guess, and a guess is the wrong input for spending money to save tax. How to produce a year-to-date figure a preparer or a lender will accept is in the year-to-date profit and loss.

Two other facts change which moves are open to you:

• Accounting method. Cash or accrual decides when income and expenses count. A corporation or partnership may use the cash method for 2026 only if its average annual gross receipts for the 3 prior years were $32,000,000 or less (§448(c); Rev. Proc. 2025-32, §4.30). Most small businesses are well under it. The method in use is on last year’s return.
• Entity type. A sole proprietor, a partnership, an S corporation and a C corporation are taxed differently, and some moves below only work for some of them. Each row says which.

Year-end tax moves and the number each one needs

Move	What it does	Deadline	Suits	Number the books supply
Buy and place equipment in service	Deducts most or all of the cost this year under Section 179 or bonus depreciation	In service by Dec 31	Any entity with the cash and a real need	Fixed asset list, year’s purchases, active business income
Expense small items under the de minimis rule	Deducts items up to $2,500 each instead of capitalizing them	Policy in place on Jan 1; election on the return	Any entity without audited statements	Every asset purchase under $2,500, coded consistently
Prepay expenses	Deducts next year’s insurance, rent or subscriptions this year	Paid by Dec 31	Cash method	Renewal dates and amounts
Delay invoices, pay bills early	Moves income out of and expenses into this year	Dec 31	Cash method only	Open invoices, unpaid bills
Accrue employee bonuses	Deducts this year’s bonus if paid by March 15	Fixed by Dec 31, paid by Mar 15, 2027	Accrual method; not owner bonuses in most pass-throughs	Bonus amounts per employee
Defer wages into a 401(k)	Reduces taxable wages for employees and owner-employees	Final 2026 payroll	Businesses with a 401(k) plan	Year-to-date wages and deferrals
Fund a SEP	Deducts employer retirement contributions	Return due date, including extensions	Owners with few or no employees	Net profit or W-2 wages per person

The sections below take each row in turn.

Equipment: Section 179 and bonus depreciation

A business that needs a machine, a computer or a vehicle can usually deduct most or all of its cost in the year it goes into use, instead of spreading the deduction over a recovery period of 5 or 7 years for most equipment. Two provisions do it:

• Section 179. An election, made asset by asset. For tax years beginning in 2026 the limit is $2,560,000, reduced dollar for dollar once the year’s Section 179 property passes $4,090,000 (Rev. Proc. 2025-32, §4.24). The deduction cannot exceed taxable income from the active conduct of a business; the excess carries to the next year (§179(b)(3)).
• Bonus depreciation. 100% for qualified property acquired after January 19, 2025, made permanent by Public Law 119-21 (Notice 2026-11). It applies automatically unless the business elects out for a class of property, and it has no taxable income limit.

Placed in service means “ready and available for a specific use” (IRS Publication 946). A truck ordered on December 20 and delivered on January 6 is a 2027 asset. Vehicles carry their own caps, set by weight; those are in Section 179 for vehicles, and the full comparison of the two provisions, with the entries, is in Section 179 vs bonus depreciation.

What the books supply. The year’s asset purchases, each with its date in service, posted to fixed asset accounts at full cost rather than to repairs or supplies. A $14,000 machine coded to supplies in March looks like a deduction already taken, and nobody can tell whether a December purchase is needed to reach a target. The preparer also needs active business income for the Section 179 limit, which is net income from the reconciled books.

What is the $2,500 expense rule?

It is the de minimis safe harbor in Treas. Reg. §1.263(a)-1(f). A business without an applicable financial statement (audited statements, in most cases) can deduct items costing up to $2,500 per invoice or per item instead of capitalizing them. With an applicable financial statement the limit is $5,000 (IRS tangible property regulations, updated August 4, 2026).

All of its conditions matter:

• The business must expense such items under “a consistent accounting procedure or policy existing at the beginning of the taxable year.” Without an applicable financial statement the policy does not have to be written, but it has to exist on January 1 and be followed all year.
• The election is a statement titled “Section 1.263(a)-1(f) de minimis safe harbor election,” attached to the timely filed original return, including extensions. The preparer makes it each year.
• The limit is per invoice or per item, as shown on the invoice. Ten $2,000 laptops on one invoice qualify item by item if the invoice lists each.

It is a December question for one reason: the policy has to be in place at the start of the year, so a business planning to use it for 2027 should decide before January 1. In the books, the job is to code every purchase under the threshold the same way, so the preparer can apply one rule to the whole year.

Prepaid expenses and the 12-month rule

A cash-method business can deduct some expenses paid in December for benefits that run into next year. The rule is in Treas. Reg. §1.263(a)-4(f): no capitalization is needed when the right or benefit does not extend beyond the earlier of 12 months after it begins or the end of the tax year after the year of payment. IRS Publication 538 gives the example: a calendar-year business pays $10,000 on July 1 for a one-year insurance policy starting that day, and “the full $10,000 is deductible” in the year paid.

The same logic covers a December 2026 payment for insurance or a software subscription running January 1 to December 31, 2027. A prepayment covering more than 12 months, or one that runs past the end of 2027, fails the rule and is deducted over its term. A business that has not been using the 12-month rule needs IRS approval, through a change in accounting method, before it starts (Publication 538).

Two limits apply. An accrual-method business also has to meet the economic performance rules before it deducts a prepayment. For insurance, payment can satisfy them; for rent and most services it does not, because performance happens as the property is used or the work is done (Treas. Reg. §1.461-4). Ask the preparer before relying on this. And a prepayment is real money spent early, which only makes sense if the expense was coming anyway.

What the books supply. Renewal dates and amounts for insurance, rent and annual subscriptions. On accrual books, a prepayment goes to a Prepaid Expenses asset and is expensed month by month through 2027, even when the return deducts it in 2026. That difference is normal, and the preparer adjusts for it on the return.

Timing income and bills on the cash method

A cash-method business reports income when it is received and deducts expenses when they are paid, so moving a date across December 31 moves the tax. Holding invoices until January, or paying January’s bills in December, is the oldest year-end move there is. Two rules limit it:

• Constructive receipt. “Income is constructively received when an amount is credited to your account or made available to you without restriction” (Publication 538). A customer check that arrives on December 30 is 2026 income, even if it is deposited on January 4. Delaying the invoice works; sitting on a check that has already arrived does not.
• Credit card payments. An expense charged to a credit card is generally deductible when it is charged, not when the card bill is paid (Rev. Rul. 78-39). A December charge counts for 2026.

None of this works on the accrual method, where income counts when it is earned and expenses when they are incurred.

What the books supply. The open invoices and unpaid bills, which on a cash-basis file are often not in QuickBooks at all. If invoices are created in another system and only the deposits reach the books, the preparer cannot see what is waiting.

Year-end bonuses on the accrual method

An accrual-method business can deduct a 2026 bonus on its 2026 return even when the money goes out in 2027, as long as it is paid within 2½ months after year end. Compensation received after “the 15th day of the 3rd calendar month after the end of the employer’s taxable year” is presumed deferred compensation and is deducted when the employee includes it in income (Treas. Reg. §1.404(b)-1T). For a calendar-year business, that date is March 15, 2027. The liability also has to be fixed by December 31: the amount and the people receiving it are set, not left to a discretionary decision in February (Treas. Reg. §1.461-1(a)(2)).

The rule does not reach most owners. Under §267(a)(2) and (e), an accrual-method business cannot deduct an amount owed to a related cash-method taxpayer until it is paid. For an S corporation, that is any shareholder, at any ownership percentage; for a partnership, any partner; for a C corporation, a shareholder owning more than 50%. An owner’s bonus in those cases is deducted in the year it is paid.

On the cash method, a bonus is deducted when it is paid, so a 2026 deduction means a 2026 payroll. How the bonus is withheld, and why holiday gift cards are wages too, is in are Christmas bonuses and gifts taxable.

What the books supply. A Bonuses Payable liability posted on December 31 with the amounts, cleared by the payroll that pays it. Bonuses run through payroll like any wages, with withholding; the year-end payroll schedule is in the year-end payroll checklist.

Retirement contributions

Retirement plans are the year-end move that moves money to the owner rather than away from them, and their deadlines are not all December 31.

• 401(k) deferrals. An employee, including an S corp owner on payroll, can defer up to $24,500 of 2026 wages, plus a catch-up of $8,000 at age 50 or over, or $11,250 at ages 60 to 63 (IRS, Notice 2025-67). Deferrals come out of pay, so they have to be in the payrolls that run in 2026. An owner who wants to defer more needs the change in the final payroll of the year, before the provider’s cutoff.
• SEP. A SEP can be set up and funded for 2026 “as late as the due date (including extensions)” of the business return, at up to 25% of each employee’s pay, and the rate “must be uniform for all employees” (IRS, SEP plans). For 2026 the contribution per person is capped at $72,000, on no more than $360,000 of pay, and for a self-employed owner the 25% becomes 20% of net earnings from self-employment (IRS Publication 560). It suits an owner with no employees, or a few whom the owner is prepared to cover at the same rate.

Other plans, and when a new plan has to be adopted, depend on the plan document; the plan provider has the dates. The SEP and solo 401(k) dates by entity, including the S corp payroll deadline for deferrals, are in SEP IRA and solo 401(k) deadlines for 2026.

What the books supply. Year-to-date W-2 wages per person for a corporation, or net profit from self-employment for a sole proprietor or partner. A SEP percentage applied to a guessed profit has to be corrected later.

Why a guessed profit is the usual failure

Most bad year-end decisions are made from a wrong profit figure rather than a wrong reading of the tax code. Three ways it goes wrong:

• Unreconciled accounts. Uncategorized deposits that are really owner transfers or loan proceeds inflate income. Missing bills from a personal card understate expenses. Either way, the figure the decision is based on is wrong.
• Spending to save tax that was never owed. An owner who believes profit is $200,000 buys $60,000 of equipment in December. The books, finished in February, show $140,000. The deduction was real, but the purchase was justified by $60,000 of profit that did not exist, and the cash is gone.
• Assets already expensed. Purchases coded to supplies or repairs during the year are deductions already taken, so the books show a lower profit than the year will report once the preparer moves them to fixed assets. The business plans against the wrong number in the other direction.

The fix is the same in every case: reconcile every bank and card account through November 30 before the conversation with the preparer, not after.

What the books should show by mid-December

To have the year-end conversation with useful numbers, bring the preparer:

1. A profit and loss and balance sheet through November 30, with every bank, card and loan account reconciled to its statement.
2. The year’s fixed asset additions, each with cost and date placed in service, and any disposals.
3. Year-to-date payroll by person: wages, deferrals, and S corp owner health insurance.
4. Owner draws or distributions, and any money the owner put in.
5. A list of open invoices and unpaid bills, if the business uses the cash method.

That is the start of the year-end close. The full order of work, through to locking the year, is in the year-end bookkeeping checklist, and the documents the preparer will ask for in January are in what your CPA needs at year end.

Common questions about year-end tax planning

What business expenses are 100% tax deductible?

Ordinary and necessary business expenses are deductible in full under §162: rent, wages, supplies, insurance, software, advertising, professional fees and the business share of utilities, among others. The main exceptions are business meals, which are generally 50% deductible (§274(n)), and entertainment, which is not deductible at all (§274(a)). Assets are deducted through depreciation, Section 179 or bonus depreciation rather than as expenses.

Can you write off 100% of a business meal?

Generally not. The deduction for business meals is limited to 50% under §274(n), with narrow exceptions such as meals provided as part of a company-wide event for employees. In the books, keep meals in their own account so the preparer can apply the limit; meals coded to supplies or office expense get deducted in full by mistake.

Can an LLC reduce taxes?

The LLC itself does not change the tax. How it is taxed does: a single-member LLC is taxed like a sole proprietor by default, and a multi-member LLC like a partnership, unless it elects to be taxed as an S or C corporation. An S election changes how the owner is paid and what the books must show, which is covered in S corp election bookkeeping. Whether it saves tax depends on profit and on a reasonable salary, which is a question for the preparer.

What is the $600 rule?

It was the threshold for sending a 1099-NEC to a contractor. For payments made in 2026 the threshold is $2,000 (Instructions for Forms 1099-MISC and 1099-NEC, December 2026). Who needs one and when it is due is in when to send a 1099.

Is it worth buying equipment just for the tax deduction?

Only if the business needed it anyway. A deduction saves tax at the owner’s tax rate, so spending $10,000 to save part of it still leaves the business with less cash than before. The purchase also has to be placed in service by December 31 to count, and the cash it uses is gone in January when the tax bill on the rest of the profit arrives.

When the books are not current through November

Every row in the table needs a figure the books hold, and the figures are only useful while there is time to act. If the books stopped in the summer, the planning conversation is empty in December and the preparer works from a box of statements in February. A catch-up brings the year current, reconciled to every statement, so the decision is made on real numbers. How long it takes depends on the number of months behind; the estimate is in how long catch-up bookkeeping takes.

$99per month of backlog20% off 6+ months

When to hand this off: if more than two months of 2026 are unreconciled in mid-November, the year-end decisions will be made on guessed numbers. A free file review tells you how many months are behind and what bringing them current costs, before you commit to anything. What a catch-up covers is on the catch-up bookkeeping page.