Year-End Tax Planning for Business Owners: Strategic Moves Before December 31, 2026

October means two things if you run a business: Putting up Halloween decorations, and a shrinking window to make moves that affect what you owe the IRS for 2026. Whatever bookkeeping catch-up or planning you’ve been meaning to get to, the calendar doesn’t care how busy Q4 gets. December 31 arrives on schedule.

If you went through this exercise with me last year, some of what follows will look familiar. Prepaying expenses, timing invoices, timing retirement contributions correctly — these strategies don’t really change from year to year. What changes is the fine print: contribution limits, thresholds, and how the current version of the tax code treats them. That’s what this post updates for 2026.

One thing up front, because it tends to dominate year-end planning conversations: if you’re weighing equipment purchases before year-end, I’m not going to re-walk you through Section 179 and bonus depreciation mechanics here. I already covered that in detail, including how Minnesota’s 80% bonus depreciation addback interacts with a full federal deduction, in the Section 179 deduction guide for 2026. If equipment is your main year-end lever, start there and come back to this post for everything else.

As always, the information here is general in nature and hasn’t been customized for your specific situation. If you want a recommendation tailored to your business, feel free to schedule a consultation.

Equipment Purchases

Here’s the headline, briefly: 100% bonus depreciation is now permanent under the One Big Beautiful Bill Act, not a temporary window that phases down, which is a real shift from the pre-2025 world where the percentage was sliding toward 40%. Section 179 expensing sits at a $2.5 million cap that adjusts for inflation each year, including 2026. For most small and mid-sized businesses, qualifying equipment placed in service before December 31 is deductible in full in the year you buy it, not spread across five or seven years.

The mechanics of choosing between Section 179 and bonus depreciation, handling vehicle purchases under the luxury auto limits, and — if you’re filing a Minnesota return — dealing with the state’s 80% bonus depreciation addback even though the federal deduction is untouched, are all covered in the Section 179 deduction guide for 2026. If you’re planning any equipment purchase in the five-figure range or higher before year-end, that’s the place to run the numbers before you buy.

Accelerating Deductions: Pay Now, Deduct Now

The basic principle behind expense acceleration is simple: if you’re a cash-method taxpayer expecting similar or higher income in 2027, paying deductible expenses now instead of waiting until January pulls that deduction into the current year. Settling outstanding vendor invoices, stocking up on supplies you know you’ll need, and making a planned purchase in December instead of January are all straightforward versions of this.

There’s a more powerful version that gets overlooked: prepaying certain expenses for the year ahead. Under what’s generally called the 12-month rule, a cash-method business that prepays for a right or benefit can deduct the full payment in the year it’s paid, rather than spreading it over the life of the benefit, as long as the benefit doesn’t extend beyond the earlier of 12 months after the payment date or the end of the tax year following the year of payment. In plain terms, a calendar-year cash-method business that pays in December for a 12-month contract running from January through December of the following year can generally deduct the entire payment in the year it was paid.

Let’s say a landscaping business owned by Marcus normally renews its liability insurance every January, paying around $9,600 for a 12-month term. If 2026 has been a strong year for him and he expects 2027 to look similar, prepaying that policy in December 2026 lets him claim the full $9,600 deduction in 2026 instead of waiting for 2027.

This same logic covers legal and professional fees. If you’re prepaying your accountant, attorney, or a consultant for services rendered in the ordinary course of business and the arrangement fits the 12-month window, that payment is a candidate for the same treatment. The same caution applies here as with any prepayment strategy: it needs to reflect a real, ordinary business arrangement, not a payment structured purely to shift timing with no underlying business reason.

Deferring Income

The flip side of accelerating expenses is deferring income, and this is where the mechanics catch people off guard, because the deferral has to be real, not just a matter of when you get around to depositing a check.

For cash-method taxpayers, which describes most sole proprietorships, partnerships, and smaller S corporations, income is generally taxable when received, not when earned. That creates a legitimate planning lever: if you have discretion over when you invoice, delaying billing on work you’d otherwise invoice in late December until early January pushes that income into 2027.

The doctrine of constructive receipt puts a real limit on how far this goes. Constructive receipt means you’re treated as having received income once it’s made available to you without substantial restriction, whether or not you’ve actually deposited it. If a client hands you a check on December 29 and you simply choose not to cash it until January, that’s still 2026 income under this doctrine. The check sitting uncashed in a drawer doesn’t defer anything. What actually works is the timing of the invoice and, correspondingly, when the client cuts and delivers payment in the first place.

Let’s say Priya runs a marketing consultancy and typically wraps up several December projects with invoices due immediately. If her clients are flexible on timing, holding those invoices until the first few days of January genuinely defers that income to 2027 for her cash-method business. What she can’t do is invoice in December, receive a check before year-end, and simply sit on it, hoping that counts as next year’s income.

Deferral only makes sense if you expect to be in the same or a lower bracket in 2027, or if lowering 2026 income serves another purpose, like staying under a phase-out threshold that matters to you. If you’re expecting meaningfully higher income next year, deferring this year’s income into a higher-taxed year works against you, not for you.

Retirement Contributions

This is worth its own section because it’s one of the more common points of confusion in year-end planning, not because the rule is complicated, but because the December 31 deadline governing so much of this list doesn’t apply the same way here.

For a Solo 401(k) or SEP IRA, the employer-side contribution, meaning the profit-sharing portion of a Solo 401(k) or the entire contribution to a SEP IRA, generally can be made up until your business’s tax filing deadline, including extensions. For a calendar year business with a tax return due March 15th or April 15th, that’s already buying you three or four months into 2027 to make the payment, but still include the expense on your 2026 tax return. And if you file an extension, you get even more time. If you’re a business who expects to make profit-sharing contributions to a retirement plan, file an extension - even if you plan to file on time. Just keep in mind an extension only buys you more time to file the return and make the contribution, not more time to pay any tax you actually owe. Estimate and pay what you expect to owe by the original deadline, or you’re looking at interest and penalties regardless of the extension.

There’s a related wrinkle specific to the Solo 401(k). Thanks to a SECURE 2.0 change, a self-employed person with no other employees can now establish a brand-new Solo 401(k) plan after the close of the tax year, as late as the filing deadline including extensions, and still make an employer contribution for that prior year. That’s a genuine shift from the older rule, where the plan itself had to exist by December 31 even if the money moved later. If you assumed you’d already missed the window to set one up for 2026, it’s worth checking whether that’s actually true.

If you’re running payroll through an S corporation: the employee elective deferral portion of a Solo 401(k) generally needs to be withheld from wages actually paid during the calendar year. You can’t retroactively withhold from wages already paid in a prior year once that year has closed. So while the employer contribution can wait until the extended filing deadline, the employee deferral piece has a practical calendar-year cutoff if you’re paying yourself as a W-2 employee of your own S corp.

None of this changes the contribution limits themselves, which are indexed for inflation and typically increase modestly each year. For 2026:

• Solo 401(k): the combined employee-and-employer limit under IRC §415(c) is $72,000, with higher totals available if you qualify for catch-up contributions (an additional $8,000 at age 50 and up, or an enhanced $11,250 catch-up for ages 60 through 63 under SECURE 2.0).
• SEP IRA: generally capped at the lesser of 25% of compensation or that same $72,000 figure for 2026.
• Solo 401(k) employee elective deferral: $24,500 for 2026, before any catch-up amount, and subject to the calendar-year withholding timing noted above if you’re an S corp owner-employee.

If you’re deciding between a Solo 401(k) and a SEP IRA for the first time, or wondering whether you’ve already funded one correctly, this is a good candidate for a short conversation before year-end rather than a guess.

Bad Debt Write-Offs (Accrual Method Businesses)

If your business uses the accrual method, you’ve likely already recognized revenue from invoices you sent, including some a customer never actually paid. When a customer genuinely isn’t going to pay, you generally get to write off that unpaid amount as a business bad debt under IRC §166, but only under specific conditions.

Two things have to be true. First, the debt has to be wholly or partially worthless, meaning you’ve made a genuine effort to collect and have a reasonable basis for concluding it won’t be paid, not just that you’d rather stop chasing it. Second, and this is the part that trips up cash-method businesses specifically, the amount has to have been previously included in your income. A cash-method business that never invoiced, and therefore never recognized, that income in the first place has nothing to write off, because it never reported the amount as taxable income to begin with. This is really an accrual-method opportunity.

Let’s say an accrual-method contracting business run by a hypothetical owner named Dave invoiced a client for $14,000 of completed work back in March 2026 and included that amount in revenue at the time. By November, after repeated attempts to collect, it’s become clear the client has closed shop and isn’t paying. If Dave can document his collection efforts and reasonably conclude the debt is worthless, he can write off that $14,000 as a bad debt deduction in 2026, offsetting income he already paid tax on when he originally booked it.

Year-end is a natural time to go through aging receivables and identify accounts that have genuinely gone cold, because claiming the deduction in the correct year, the year worthlessness actually occurs, matters. Waiting too long to address an obviously uncollectible account can create disputes later about when that determination should have been made.

Gift Card Breakage (Accrual Method Businesses)

If your business sells gift cards and uses the accrual method, there’s a lesser-known year-end opportunity that works like bad debt write-offs in reverse. Instead of writing off money you’re owed but will never collect, you’re recognizing money you owe but will likely never have to pay out.

When you sell a gift card, the cash you receive generally isn’t income yet. It’s a liability, an obligation to provide goods or services later. Under IRC §451(c) and its regulations, you can generally defer recognizing at least part of that revenue past the year of sale, as long as you’re also deferring it for financial statement purposes and have a reliable system for tracking issuance and redemption.

Some portion of gift cards, though, realistically never get redeemed. Cards get lost, forgotten in a drawer, or simply never used. This unredeemed portion is called breakage, and if you can reasonably estimate it, based on your own historical redemption data, not a guess, you can generally recognize that portion as income in proportion to your actual redemption pattern, rather than carrying it as a liability indefinitely.

Two things to keep in mind before doing this at year-end. First, recognizing breakage income for tax purposes doesn’t discharge your legal obligation. If a customer shows up in three years with an old gift card, you generally still have to honor it. Income recognition and the underlying liability to the customer are two separate questions. Second, check your state’s rules. A number of states restrict or flatly prohibit gift card expiration, and some states require unredeemed balances to be turned over to the state as unclaimed property after a dormancy period, rather than letting your business keep the value at all. Between customer expectations, state expiration limits, and escheat exposure in the states that do require it, breakage estimates need to be conservative and well-documented, not just a percentage pulled from an old rule of thumb.

This is a fairly specific opportunity, mainly relevant if you’re a retailer, restaurant, salon, or other business with meaningful gift card volume on an accrual basis, but if that’s you, it’s worth reviewing your unredeemed gift card liability before year-end rather than assuming it just sits there forever.

Inventory Management: Writing Down What Won’t Sell

If your business carries inventory, year-end is also the time for an honest look at what’s sitting on the shelves. Obsolete, damaged, or otherwise unsellable inventory doesn’t have to stay on your books at full cost. Depending on the inventory valuation method you use, businesses can write down goods that are unsellable at normal prices, whether due to damage, style changes, or excess quantity, to reflect their actual value.

The specific mechanics depend on your inventory method, and this is genuinely an area where getting the valuation approach right matters, both for the deduction itself and for consistency with how you’ve valued inventory in prior years. But the year-end planning point is straightforward: if you know you’re carrying inventory you’ll never sell at anything close to its original cost, an honest write-down before year-end reflects that reality in your current-year numbers instead of deferring the loss until you eventually dispose of the goods.

Charitable Contributions: Entity Type Changes the Math

If your business is making charitable contributions before year-end, how that deduction actually works depends heavily on your entity structure. A C corporation deducts charitable contributions at the entity level, but that deduction is capped, generally at 10% of the corporation’s taxable income, with the ability to carry forward unused amounts for a limited number of years.

Pass-through entities work differently. An S corporation or partnership doesn’t deduct charitable contributions on its own return the way a C corp does. Instead, the contribution passes through to the owners on their K-1s, and each owner claims it on their own personal return, subject to their individual AGI-based limitations, which vary depending on the type of property donated and the type of organization receiving it. That means the real-world benefit of a business-level charitable contribution ultimately depends on each owner’s individual tax situation, not just the business’s bottom line.

If you’re planning a meaningful year-end charitable contribution through your business, it’s worth confirming which side of that line your entity falls on before assuming the deduction will land the way you expect.

One Note on Entity Elections for 2027

If you’ve been wondering whether an S Corp election makes sense starting next year, this is the time to start that conversation, not late February. For a calendar-year business, Form 2553 generally needs to be filed by March 15, 2027 for the election to take effect for that year. But the decision itself is best made with a full year of 2026 numbers in hand, since profit level, reasonable compensation expectations, and your appetite for added payroll and compliance overhead all factor into whether the math works.

I put together a full framework for working through that decision, including the rough profit thresholds where the S Corp math typically starts to become worth examining, in Which Business Entity Is Right for You? A Decision Framework. If entity structure is on your mind heading into 2027, that’s the place to start, and the earlier in Q4 you have that conversation, the more options you’ll have if the answer is yes.

Documentation Still Matters

Whatever you implement from this list, the same rule applies across all of it: the paper trail needs to exist, and it needs to reflect a real business decision, not a tax-motivated one dressed up after the fact. Prepaid expenses need genuine invoices and payment records showing when payment was made and what it covered. Bad debt write-offs need documented collection attempts. Inventory write-downs need a defensible, consistently applied valuation methodology. If any of these positions ever get a closer look, the question isn’t just whether the deduction is theoretically available. It’s whether you can show your work.

When to Get Help

Some of these moves are simple enough to handle on your own: reviewing aging receivables, prepaying a known and recurring expense, deciding whether to send an invoice this week or next. Others benefit from a second set of eyes, particularly the Solo 401(k) versus SEP IRA decision and its deadlines, any bad debt or inventory write-down large enough to move the needle on your return, and the S Corp election question if you’re weighing it for 2027.

A year-end planning conversation in October or November, while there’s still runway to act, is worth more than the same conversation in late December, when most of these options have already closed.

The Bottom Line

None of these strategies are complicated in isolation. What makes year-end planning valuable is putting them together against your actual numbers: how 2026 is shaping up, what you expect from 2027, and which levers you actually control as a cash-method or accrual-method business. Expense timing, income timing, retirement contributions, receivables cleanup, inventory valuation, charitable giving, and entity structure are separate decisions, but they interact with each other more than they first appear to.

You have roughly ten weeks left in the year as of this post. That’s enough time to do this right, but not enough time to do it at the last minute. If you haven’t started thinking through your 2026 year-end plan, now is the time to start.

Questions About Your Year-End Plan?

If any of this applies to your business and you want to work through the specifics, whether that’s the retirement contribution decision, a receivables cleanup, or whether the S Corp election makes sense heading into 2027, reach out or schedule a consultation. I’ll walk through where your numbers stand today and what’s worth doing before December 31.

The information in this post is general in nature and hasn’t been customized for your specific tax situation. Year-end planning strategies depend heavily on your entity structure, accounting method, income level, and individual business circumstances. For personalized advice regarding your business’s year-end tax planning, please schedule a consultation.