Midyear Tax Planning for Privately Held Businesses

Midyear tax planning is especially important for owners of pass-through businesses, including sole proprietorships, single-member LLCs, partnerships and S corporations. Because the business generally does not pay federal income tax at the entity level, its income passes through to the owners and is reported on their individual tax returns.

For business owners, this means decisions made within the company can directly affect personal income taxes. Reviewing projected business income, deductions and tax-saving opportunities at midyear provides more time to make strategic adjustments, reduce potential tax surprises and improve the overall tax position of both the business and its owners.

Here are some key tax-planning opportunities now that we’ve reached midyear.

Rates and Brackets

Always keep an eye on your individual tax rate. The One Big Beautiful Bill Act (OBBBA), enacted in July 2025, made permanent the rates established under the Tax Cuts and Jobs Act of 2017. These rates — 10%, 12%, 22%, 24%, 32%, 35% and 37% — are generally considered favorable to individual taxpayers.

The thresholds that define tax brackets (the income ranges applicable to each tax rate) are subject to annual inflation adjustments. However, the adjustments for 2027 are expected to be relatively modest. If you expect to be in the same or lower income tax bracket for 2027 than you are for 2026, follow the traditional strategy of:

• Deferring taxable income to next year, and
• Accelerating deductible expenses to this year.

At a minimum, this approach will postpone part of your tax liability from 2026 until 2027 by reducing the amount of this year’s passed-through business income.

On the other hand, if you expect to be in a higher tax bracket next year, take the opposite approach. As feasible, accelerate income into this year and postpone deductible expenditures until 2027. That way, more business income will be taxed at this year’s lower rate instead of at next year’s higher rate.

QBI Deduction

For sole proprietors and owners of pass-through entities, the Section 199A qualified business income (QBI) deduction is a big deal. Originally introduced under the TCJA, the OBBBA made it permanent, offering eligible taxpayers a deduction generally equal to 20% of QBI (not to exceed 20% of taxable income). The OBBBA also added a $400 minimum QBI deduction for eligible taxpayers with at least $1,000 of QBI, effective for tax years beginning after December 31, 2025.

QBI is generally defined as the net amount of qualified items of income, gain, deduction and loss that are effectively connected with the conduct of a U.S. business. The midpoint of the year is a good time to check into whether your small business may qualify for it and how much you might be able to deduct. Here are some finer points to keep in mind:

General phaseout. Above specified taxable income levels, the QBI deduction for income from an eligible business can’t exceed the greater of 1) 50% of the amount of W-2 wages paid to employees by the qualified business during the tax year, or 2) the sum of 25% of W-2 wages plus 2.5% of the cost (not reduced by depreciation taken) of qualified property.

For 2026, these limitations generally apply when taxable income (calculated before any QBI deduction) exceeds $201,750 ($403,500 for married couples filing jointly). Also for 2026, these limitations are fully phased in once taxable income exceeds $276,750 ($553,500 for joint filers).

Special phaseout for certain businesses. For specified service trades and businesses (SSTBs), the QBI deduction phases out and is completely disallowed above specified taxable income levels. For 2026, the SSTB phaseout generally starts once taxable income (calculated before any QBI deduction) exceeds $201,750 ($403,500 for joint filers). The deduction phases out completely in 2026 once taxable income exceeds $276,750 ($553,500 for joint filers). SSTBs commonly include businesses that involve investment-type services and most professional practices (other than engineering and architecture).

Taxable income limitation. In addition to the aforementioned limitations, a taxpayer’s allowable QBI deduction can’t exceed 20% of the individual’s taxable income, calculated before any QBI deduction and reduced by any net capital gain amount (defined as net long-term capital gains in excess of net short-term capital losses plus qualified dividends). Because of this restriction and others, it’s important to plan your tax strategies carefully. Some moves you make (or don’t make) can helpfully increase your allowable QBI deduction. But others — such as claiming substantial first-year depreciation deductions or making large deductible retirement plan contributions — can inadvertently reduce it.

Fun fact: You can also claim the QBI deduction for up to 20% of qualified dividends from a real estate investment trust and up to 20% of qualified income from publicly traded partnerships.

Ideal Time

Midyear is an ideal time to step back and assess how your small business’s projected income, deductions, credits and owner-level tax picture are shaping up. You should do so again at year end, but planning opportunities may be more limited then.

Because the rules can be complex — and one move can affect another — work closely with Kirsch CPA Group. With proactive planning now, you may be able to reduce surprises at tax time and position both yourself and your business for a stronger 2026.

Schedule an appointment to learn how we can support you

© Copyright 2026. All rights reserved.