The IRS just dropped a bombshell on small business owners. Starting January 1, 2026, several key tax provisions that have saved businesses thousands of dollars annually are set to expire or undergo major changes. If you’re not preparing now, you could face a tax bill that’s 15-30% higher than what you paid in 2025.
The most significant change? The immediate expensing of research and development costs—a benefit worth $13.2 billion to businesses in 2023—will be completely phased out. Meanwhile, the 20% Section 199A deduction for pass-through entities, which saved the average S-Corp owner $4,800 last year, hangs in the balance as Congress debates its future.
Research and Development Expensing: The $50,000 Problem
The biggest shock for tech startups and manufacturing companies comes from the complete elimination of immediate R&D expensing. Under current rules, businesses can deduct 100% of qualifying R&D expenses in the year they’re incurred. Starting in 2026, these costs must be capitalized and amortized over five years for domestic research, or 15 years for foreign research.
What Qualifies as R&D
The IRS defines R&D broadly. Software development costs for a SaaS company creating new features, a restaurant chain testing new recipes, or a manufacturer developing improved production processes all qualify. Even market research for new product launches can count under certain circumstances.
Take DataFlow Solutions, a mid-sized software company that spent $200,000 on R&D in 2025. Under current rules, they deducted the full amount, saving approximately $42,000 in federal taxes (assuming a 21% corporate rate). Starting in 2026, they can only deduct $40,000 in year one ($200,000 ÷ 5 years), saving just $8,400—a difference of $33,600.
Planning Strategies Before the Deadline
Smart business owners are accelerating R&D spending into 2025. Consider these moves:
- Fast-track software development projects planned for early 2026
- Pre-pay contractors and consultants for R&D work to be completed in 2025
- Purchase R&D equipment and materials before December 31, 2025
- Document all qualifying activities meticulously—the IRS will scrutinize R&D claims more heavily
Section 199A Deduction: The Pass-Through Entity Cliff
The Section 199A deduction allows eligible pass-through entities (S-Corps, partnerships, sole proprietorships) to deduct up to 20% of their qualified business income. For a business owner with $150,000 in QBI, this translates to a $30,000 deduction, potentially saving $7,200 in taxes.
This provision expires December 31, 2025, unless Congress acts. Historical precedent suggests it will likely be extended, but probably with modifications that could reduce its value.
Current Income Limits and Restrictions
The deduction phases out for high earners: $182,050 for single filers and $364,100 for married filing jointly in 2024 (amounts adjust annually for inflation). Service businesses like law firms, accounting practices, and consulting companies face additional restrictions above these thresholds.
Maria Rodriguez, who owns a digital marketing agency generating $400,000 annually, currently receives no Section 199A benefit because her income exceeds the service business threshold. However, her husband’s manufacturing business with $200,000 in QBI still qualifies for the full deduction.
What Business Owners Should Do Now
- Calculate your potential exposure if the deduction disappears—multiply your QBI by 20% and your marginal tax rate
- Consider income-shifting strategies if you’re near the phase-out thresholds
- Evaluate whether converting to C-Corp status makes sense if the deduction expires
- Document QBI calculations carefully, as IRS audits of Section 199A claims increased 340% in 2024
Bonus Depreciation and Equipment Expensing Changes
The Tax Cuts and Jobs Act’s generous bonus depreciation provision is winding down on schedule. In 2025, businesses can immediately deduct 60% of qualifying equipment purchases, with the remainder depreciated normally. This drops to 40% in 2026, 20% in 2027, and zero in 2028.
Section 179 expensing—which allows immediate deduction of up to $1.16 million in equipment purchases (2024 limit)—remains unchanged. However, the phase-out threshold starts at $2.89 million in total equipment purchases.
The Math on Equipment Purchases
Consider a construction company buying a $100,000 excavator in 2025 versus 2026:
- 2025 purchase: $60,000 immediate deduction via bonus depreciation, plus regular depreciation on remaining $40,000
- 2026 purchase: $40,000 immediate deduction, plus regular depreciation on remaining $60,000
The timing difference could defer $20,000 in deductions, potentially costing $4,200 in additional taxes in year one.
Strategic Equipment Timing
Businesses should audit their equipment replacement schedules now. Items that can reasonably be purchased in 2025 instead of 2026 will generate significantly higher immediate tax benefits. This includes:
- Computer systems and software
- Manufacturing equipment
- Vehicles over 6,000 pounds (which qualify for bonus depreciation)
- Office furniture and fixtures
State Tax Considerations and Conformity Issues
State tax compliance becomes more complex when federal provisions expire. Currently, 23 states conform automatically to federal tax changes, while others require legislative action. This creates a patchwork of rules that could leave businesses facing different treatment at federal and state levels.
California, for instance, never adopted the federal R&D expensing rules, so businesses there already amortize these costs over multiple years for state purposes. Conversely, Texas has no state income tax, so federal changes hit businesses there directly without state-level mitigation.
Preparing Your Business for 2026
The coming tax changes require immediate action, not wishful thinking about Congressional intervention. Start by calculating your specific exposure: How much did you claim in R&D expenses, Section 199A deductions, and bonus depreciation in 2024? Apply the new rules to those numbers to estimate your 2026 tax increase.
Next, accelerate deductible expenses into 2025 wherever possible. This isn’t just about major R&D projects—small expenses add up. A $500 software subscription paid annually instead of monthly, contractor payments made in December instead of January, or equipment purchases moved up by a few months can collectively save thousands.
Finally, consider structural changes to your business. Some companies may benefit from converting to C-Corp status if pass-through advantages disappear. Others might restructure operations to minimize R&D capitalization requirements.
The businesses that thrive through these changes will be those that plan now, not those that wait to see what happens. Your 2026 tax bill depends on decisions you make in the next few months.