The tax landscape for business owners is shifting in 2026, and many of the changes trace back to provisions in the Tax Cuts and Jobs Act (TCJA) that were set to expire or phase down. Whether you operate as a sole proprietor, partnership, S corporation, or C corporation, this year demands closer attention to your tax strategy than most. The uncertainty surrounding several key provisions means planning for multiple scenarios — not just current law — is essential.
What follows is a clear-eyed look at the provisions most likely to affect your business in 2026.
The Section 199A Deduction Faces Uncertainty
The qualified business income (QBI) deduction allows eligible pass-through business owners to deduct up to 20 percent of their qualified business income. Enacted as a temporary TCJA provision, it was set to expire after 2025. Its fate has been subject to active legislative debate — and as of this writing, the deduction's long-term status depends on whether Congress enacts an extension, a modification, or allows expiration.
Business owners who have relied on this deduction need to plan for the possibility that it is modified or reduced. If the deduction disappears, the effective tax rate for many South Jersey sole proprietors, partnership members, and S corporation shareholders increases meaningfully. Modeling the impact and identifying offsetting strategies is work to do now, not after a legislative change takes effect.
Bonus Depreciation Continues Its Phase-Down
The 100 percent bonus depreciation that allowed businesses to immediately expense the full cost of qualifying assets has been phasing down by 20 percentage points per year since 2023. In 2026, the bonus depreciation rate is 20 percent. This means a business purchasing $100,000 in qualifying equipment can immediately deduct $20,000, with the remaining $80,000 depreciated over the asset's useful life.
This phase-down significantly affects cash flow planning. Section 179 expensing remains an alternative path to full first-year deduction for many small businesses — with a $1,220,000 expensing limit in 2026. Business owners planning significant equipment or technology purchases should evaluate whether to accelerate or defer based on their projected income and the available deduction rates.
Individual Tax Rates May Revert for Pass-Through Income
Many business owners report business income on their individual returns — sole proprietors on Schedule C, partnership members and S corporation shareholders on Schedule K-1. If the TCJA's individual rate reductions expire as scheduled without extension, the top marginal rate reverts from 37 percent to 39.6 percent, and lower brackets adjust upward as well. The 22 percent bracket would revert to 25 percent, and the 24 percent bracket to 28 percent.
A South Jersey S corporation shareholder receiving $300,000 in pass-through income may face a meaningfully higher effective rate with no action required on their part — the rates simply revert under current law if Congress does not act.
The Estate and Gift Tax Exemption May Decrease
The TCJA roughly doubled the estate and gift tax exemption, which currently stands at approximately $13.6 million per individual. If this provision expires, the exemption is projected to drop to approximately $7 million per individual (adjusted for inflation). For South Jersey business owners engaged in succession planning or wealth transfers, this is a significant deadline. The window to transfer assets at the higher exemption amount is open now — and may not remain so.
Research and Development Expense Treatment
Under a provision effective since 2022, businesses must amortize domestic R&D expenses over five years rather than deducting them in the year incurred. A company that spent $200,000 on qualifying R&D in 2026 can deduct only $40,000 this year, with the rest spread over subsequent years. Legislative proposals to restore immediate R&D deductibility have not been enacted as of this writing.
Corporate Tax Rate Stability
The TCJA's reduction of the federal corporate income tax rate to 21 percent was made permanent, so C corporations are not facing the same sunset uncertainty as pass-through entities. Legislative proposals to adjust the corporate rate continue to circulate, and business owners should remain attentive to changes that affect long-term entity structure decisions.
New Jersey Business Owners: The BAIT Election
New Jersey's pass-through business alternative income tax (BAIT) allows eligible pass-through entities to pay state income tax at the entity level, which is then deductible as a business expense on the federal return without the $10,000 SALT cap limitation. This effectively restores a meaningful federal deduction for NJ pass-through owners. Business owners who have not evaluated the BAIT election should do so before year-end.
Real-World Scenario
A Moorestown S corporation owner generating $425,000 in annual business income built his plan around the Section 199A deduction, bonus depreciation, and current individual tax brackets. His Enrolled Agent modeled three scenarios: full TCJA extension, full expiration, and partial extension. The difference between best and worst outcomes exceeded $31,000 in annual tax liability — enough to justify proactive changes to retirement contributions, equipment timing, and compensation structure before year-end.
Frequently Asked Questions
Q: Should I change my business entity structure because of 2026 tax changes?
A: Entity choice decisions should be driven by your overall business and financial situation, not a single year's law changes. That said, if you have never formally analyzed whether your current structure is tax-optimal, 2026 is a strong year to do that review — especially given the potential rate changes for pass-through versus C corporation income.
Q: How does New Jersey's BAIT election work with federal estimated taxes?
A: When an eligible pass-through entity makes the BAIT election, the entity pays NJ income tax, which becomes a deductible business expense at the federal level. Individual partners or shareholders still need to manage their federal estimated tax obligations based on their net income after the entity-level deduction.
Q: What should I do right now to prepare for 2026 changes?
A: Run projections under multiple scenarios, maximize retirement contributions, evaluate whether planned equipment purchases should be accelerated, review your estate plan if your assets are significant, and assess the NJ BAIT election. An Enrolled Agent at HofflerSmith can coordinate all of these for you.
Tax law changes reward those who plan ahead and penalize those who react late. At HofflerSmith Financial Services, we monitor tax legislation year-round and advise our business clients on how to position themselves regardless of which provisions survive, expire, or change.
Contact HofflerSmith Financial Services now to review how 2026's tax landscape affects your business and to build a strategy designed to work across multiple scenarios.