Turn Strong Business Growth Into a Year-End Tax Planning Opportunity

For most small business owners, strong revenue growth is cause for celebration. However, higher profits can also mean a larger tax bill. If your business is on track for a particularly successful year, now is the time to evaluate year-end tax planning opportunities that could help manage your tax liability. The following strategies are particularly relevant to sole proprietors and owners of pass-through entities, including partnerships, S corporations, and most limited liability companies.

Start With a Year-End Tax Projection

Many business owners focus on revenue growth without fully considering its potential tax implications. A year-end tax projection can help you estimate your tax liability, identify potential cash flow concerns, and evaluate planning opportunities while there is still time to act.

Your projection should take into account several factors, including:

Year-to-date revenue and expenses,
Anticipated business results for the remainder of the year,
Significant asset purchases,
Owner compensation and distributions, and
Other sources of income reported on your individual tax return.

As your business grows, it may also take on additional tax compliance responsibilities. For example, hiring employees or expanding into new markets could trigger additional state and local tax filing requirements. Review any operational changes to determine how they may affect your 2026 tax obligations.

Prepare for Higher Estimated Tax Payments

Once you have a clearer picture of your projected income, evaluate whether your estimated tax payments throughout the year will be sufficient. The fourth estimated tax payment for the 2026 tax year is due January 15, 2027. Depending on your projected liability, you may need to increase this payment to avoid or minimize underpayment penalties.

Keep in mind that increasing your final estimated payment may not eliminate penalties resulting from earlier underpayments. However, special rules may provide relief when income increases substantially later in the year.

Even if your estimated payments are sufficient to avoid penalties, you could still owe a significant amount when you file your 2026 tax return. Waiting until tax season to address this liability could create unnecessary cash flow pressure. Plan ahead by setting aside funds for both your January 15 estimated payment and any additional tax you expect to owe when filing your return.

It’s also important to recognize that higher profits don’t necessarily translate into stronger cash flow. If your growing business is generating substantial taxable income but operating with limited available cash, you may need to carefully balance year-end decisions. Paying bonuses, distributing cash to owners, or investing in vehicles and equipment should be evaluated alongside upcoming tax obligations and ongoing operating expenses.

Make Tax-Smart Moves Before Year End

After reviewing your projected tax liability and cash flow position, you can begin evaluating strategies to potentially reduce your 2026 tax bill. Depending on your circumstances, several opportunities may be worth considering.

Defer Taxable Income or Accelerate Deductions

Depending on your accounting method, you may have some flexibility in determining when income is recognized and certain expenses are deducted. A traditional year-end strategy is to accelerate deductible expenses into the current year while deferring taxable income until the following year. This approach may reduce your 2026 taxable income and lower your current-year tax liability.

However, deferring income isn’t always the best strategy. If you expect business performance to remain strong or improve in 2027, you could find yourself in a higher tax bracket next year. In that situation, accelerating income into 2026 while postponing certain deductible expenses may be more advantageous. This approach could allow you to recognize more income at potentially lower current-year tax rates rather than at higher rates in 2027.

The best strategy depends on your projected income, applicable tax rates, and overall financial circumstances.

Take Advantage of the Qualified Business Income Deduction

Eligible business owners may qualify for a deduction of up to 20% of their qualified business income (QBI). Generally, the deduction is limited to 20% of taxable income before the QBI deduction, reduced by net capital gain. Additional limitations may apply depending on your taxable income, business type, and other circumstances.

For 2026, income-based limitations begin phasing in when taxable income exceeds:

$201,750 for single and head-of-household filers,
$403,500 for married couples filing jointly, and
$201,775 for married individuals filing separately.

The limitations are fully phased in at taxable income of $276,750, $553,500, and $276,775, respectively. The expanded phase-in ranges beginning in 2026 may allow some taxpayers to qualify for larger QBI deductions than under the previous rules.

If your income approaches or exceeds these thresholds, year-end planning becomes particularly important. Depending on your circumstances, deferring income or accelerating deductible expenses may help keep taxable income below the applicable thresholds or reduce the impact of the limitations. Increasing qualifying W-2 wages before year end may also help preserve or increase your deduction.

Because the QBI rules are complex and interact with other tax provisions, it’s important to evaluate the potential impact of any year-end strategy before implementing it.

Leverage First-Year Depreciation Deductions

If you’re planning to purchase equipment, machinery, vehicles, computers, or other qualifying business assets, you may be able to deduct a substantial portion, or potentially all, of the purchase price on your 2026 tax return. To qualify for a 2026 deduction, however, the asset generally must be placed in service by December 31, 2026.

Qualified improvement property and many other assets with recovery periods of 20 years or less may qualify for 100% bonus depreciation. Section 179 expensing may provide another opportunity to immediately deduct qualifying purchases, subject to an annual limit of $2.56 million for 2026. The deduction begins to phase out when eligible property purchases exceed $4.09 million.

Although accelerated depreciation can significantly reduce your current-year tax liability, tax savings alone shouldn’t drive purchasing decisions. Consider whether the assets support your business’s operational needs and whether the purchases fit within your available cash flow.

If your business continues to grow and you anticipate being in a higher tax bracket in future years, spreading depreciation deductions over multiple years could potentially produce greater long-term tax savings. Depending on your circumstances, delaying a purchase, postponing the placed-in-service date, or electing out of bonus depreciation may be worth considering.

Consider Retirement Plan Contributions

Contributing to a qualified retirement plan can be another effective way to manage your business’s taxable income while supporting long-term financial goals. If your business already sponsors a retirement plan, consider whether increasing deductible employer contributions could reduce your 2026 taxable income.

If you don’t currently offer a retirement plan, establishing one before year end may create additional tax-planning opportunities. Depending on the type of plan, you may have until the federal income tax return due date, including extensions, to establish and fund a plan and make deductible contributions for the 2026 tax year.

In addition to potential tax benefits, offering a retirement plan can help attract and retain employees while supporting your own long-term retirement objectives.

Turn Business Growth Into a Tax-Planning Opportunity

A successful year can bring both exciting opportunities and unexpected tax challenges. By reviewing your projected tax liability, evaluating cash flow needs, and identifying available tax-saving strategies before year end, you can make more informed decisions that support your business’s financial health and long-term goals.

However, year-end tax strategies shouldn’t be considered in isolation. Some planning moves can affect the availability or amount of other deductions. For example, claiming substantial first-year depreciation deductions or making significant deductible retirement plan contributions could reduce your allowable QBI deduction.

The key is to evaluate how individual strategies work together rather than focusing on any single deduction. Proactive planning with your tax advisor can help you coordinate these decisions, manage your tax exposure, and make the most of a strong business year.