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2026 Tax Deductions and Planning Guide for Small Business Owners

Published: 1/14/2026

Many California small business owners miss valuable tax deductions each year. The changes in 2026 create new opportunities worth exploring. Between the permanent restoration of 100% bonus depreciation and the expanded Section 179 limits, there may be significant savings available—particularly if you plan ahead.

The difference between a higher and lower tax bill often comes down to timing and understanding which deductions apply to your situation. Whether you run a veterinary clinic, manage properties, advise financial planning clients, or operate any other professional service business, the 2026 rules bring some changes worth reviewing. Here's what may be relevant for your situation.

Equipment and Asset Purchases: Your Biggest Opportunity

If you've spent $150,000 on a new digital X-ray system for your veterinary practice, or purchased CAD workstations and rendering servers for your architecture firm, or invested in a fleet management system for your property management company, you may be able to deduct the full amount this year.

The Section 179 deduction jumped from $1 million to $2.5 million for 2026. The phase-out now starts at $4 million instead of $2.5 million. For most California professional service businesses, the phase-out won't affect you—you can deduct every dollar you spend on qualifying equipment.

What qualifies: Computers, software, office furniture, medical equipment, diagnostic tools, servers, vehicles (with limits), and manufacturing equipment all qualify under Section 179.

The 100% bonus depreciation sweetener: Congress permanently restored 100% bonus depreciation. Buy qualifying assets before December 31, and you can deduct the full cost on your 2026 return. Last year, bonus depreciation sat at only 60%. The change to 100% means bigger immediate tax savings.

A financial advisor running an RIA from a leased office space purchases $40,000 in computers, monitors, and cybersecurity infrastructure. Under Section 179, the advisor deducts the full $40,000 in 2026. At a 35% effective tax rate, the purchase saves $14,000 in taxes.

A surgeon co-owning an ambulatory surgery center invests $300,000 in new surgical equipment. The center uses Section 179 to immediately deduct $300,000 rather than depreciating the equipment over seven years. The partners save over $100,000 in combined taxes.

Critical deadline: You must place equipment in service by December 31, 2026, to claim the deduction on your 2026 return. "In service" means you're using the equipment in your business—not just ordered or delivered.

One warning: The Section 179 deduction cannot create a loss. If your business shows $200,000 in profit and you want to deduct $250,000 in equipment, you can only deduct $200,000 this year. The remaining $50,000 carries forward to 2027.

Vehicle Deductions: Worth Tracking

Real estate agents drive to showings. Property managers inspect rental units across Los Angeles County. Surveyors travel to job sites in Riverside and San Bernardino. Financial advisors meet clients at their homes. Architects visit construction sites. If you drive for business, mileage deductions may add up significantly.

The IRS raised the standard mileage rate to 72.5 cents per mile for 2026—up 2.5 cents from 2025. Tracking your business miles can lead to meaningful deductions.

A property manager in the Bay Area drives 15,000 business miles annually, visiting rental properties and meeting with tenants. At 72.5 cents per mile, the manager deducts $10,875. Over ten years, that's $108,750 in deductions.

What counts as business mileage:

What doesn't count:

Maintaining a mileage log is important for substantiating your deduction. Record the date, starting location, destination, purpose, and miles driven for each trip. Apps like MileIQ can automate tracking, though a notebook works well too. The IRS requires documentation, and reconstructing twelve months of mileage from memory typically doesn't satisfy audit requirements.

Heavy vehicle deduction: If you buy a truck or SUV over 6,000 pounds for your contracting business, landscaping company, or any business needing hauling capacity, you can deduct the full purchase price under Section 179. A general contractor in San Diego buys a $70,000 Ford F-350 used exclusively for business. The contractor deducts $70,000 immediately.

New American vehicle credit: Buy a new American-made vehicle between December 31, 2024, and December 31, 2028, and you can deduct up to $10,000 in car loan interest annually through 2028. The incentive stacks with Section 179 for business vehicles.

Business use must exceed 50% to claim vehicle deductions. Consistent mileage tracking throughout the year helps ensure you capture the full deduction.

Home Office Deductions: California's High Housing Costs Work in Your Favor

If you're paying a $4,000 monthly mortgage in San Francisco or $3,200 rent in Irvine, part of that cost may qualify as a tax deduction.

When you use part of your home regularly and exclusively for business, you may be able to deduct home office expenses. Many financial advisors, therapists, consultants, architects, and engineers operate from home offices. The deduction can provide meaningful savings, though the IRS requirements are specific.

The exclusive use requirement: The IRS means "exclusive." If your spare bedroom doubles as an office during the day and a guest room at night, you can't claim the deduction. The space must be used only for business.

The regular use requirement: You must use the space regularly. Working from your home office twice a month doesn't qualify. Using the space as your primary business location does.

Two calculation methods:

The simplified method multiplies your office square footage (up to 300 square feet) by $5. A therapist with a 200-square-foot home office deducts $1,000 annually. Simple, but limited.

The actual expense method calculates the percentage of your home used for business, then deducts that percentage of mortgage interest, property taxes, utilities, insurance, repairs, and depreciation. An architect with a 300-square-foot office in a 2,000-square-foot home uses 15% of the house for business. The architect deducts 15% of:

Total home office deduction: $10,500.

The actual expense method wins for California professionals because housing costs run high. A $1,000 simplified deduction pales against a $10,500 actual expense deduction.

One complication: If you claim depreciation on your home office and later sell your house, you may owe depreciation recapture tax. Discuss the trade-offs with your accountant.

Everyday Deductions: The Small Expenses Add Up

Routine business expenses are worth tracking. Over time, they accumulate into meaningful deductions.

Office supplies: Pens, paper, folders, printer ink, and stamps are 100% deductible if used in your business. A financial advisory firm spending $2,000 annually on office supplies deducts the full amount.

Software and subscriptions: QuickBooks, Adobe Creative Cloud for architects, practice management software for attorneys, electronic health records for medical professionals—all deductible. A veterinary clinic paying $8,000 annually for veterinary management software deducts the full cost.

Professional development: Continuing education courses, professional licenses, bar dues, CPA exam fees, industry conferences, and trade publications qualify. A mortgage broker maintaining California DRE licenses and attending compliance training deducts those expenses.

Professional liability insurance: Malpractice insurance for surgeons, E&O coverage for financial advisors, and professional liability policies for architects are fully deductible.

Business insurance: General liability, workers' compensation, cyber liability, and business property insurance all qualify.

Business meals: You can deduct 50% of business meal costs when you meet with clients, referral partners, or advisors to discuss business. A financial advisor taking a prospective client to lunch and spending $120 deducts $60.

Items over $2,500 must be depreciated rather than immediately expensed as supplies. If you buy a $3,000 conference table, you depreciate the table over seven years rather than deducting the full cost immediately. Section 179 lets you bypass depreciation and deduct immediately, but ordinary office supplies stay simple—just deduct them.

The QBI Deduction: Worth Understanding

The Qualified Business Income deduction lets you deduct up to 20% of your business income if you operate as a sole proprietor, partner, or S corporation owner. Congress made the QBI deduction permanent in 2026—it won't expire.

A consultant operating as an S corporation earns $180,000 in qualified business income. The consultant deducts 20%, or $36,000, reducing taxable income from $180,000 to $144,000. At a 30% effective tax rate, the deduction saves $10,800.

Phase-out ranges for 2026:

If your income exceeds the phase-out range and you work in a "specified service trade or business" (most professional services including health, law, accounting, financial services, and consulting), the deduction phases out. Architects and engineers escape the specified service classification and can claim the full deduction regardless of income.

New minimum QBI deduction: For 2026, if you have at least $1,000 of QBI from an active business where you materially participate, you can claim a minimum $400 deduction even if 20% of your QBI would be less. The minimum deduction helps part-time side businesses.

The QBI deduction rules get complex fast when your income approaches or exceeds the phase-out range. Work with your CPA to structure your business and compensation to maximize the deduction.

Quarterly Estimated Tax Deadlines: Worth Noting

Missing a quarterly payment can result in IRS penalties. The penalty rate runs about 8% annually right now, which can add up over time. Here are your 2026 deadlines:

If you operate as a C corporation, your Q4 payment deadline is December 15, 2026, not January 15, 2027.

How much to pay: The IRS expects you to pay 90% of your current year's tax liability or 100% of last year's liability through withholding and quarterly payments. If your adjusted gross income exceeded $150,000 (or $75,000 if married filing separately), you must pay 110% of last year's liability to avoid penalties.

A property manager earned $250,000 in 2025 and owed $60,000 in taxes. For 2026, the manager expects similar income. To avoid penalties, the manager must pay at least $66,000 (110% of the 2025 liability) through quarterly payments.

Front-loading payments can help. Paying more in Q1 and Q2 reduces the risk of underpayment penalties if Q3 and Q4 income drops.

Year-End Tax Planning: Planning Ahead Helps

Year-end tax planning can lead to significant savings. Here are some areas worth reviewing before the calendar flips to 2027:

Accelerate expenses: If you need new equipment, supplies, or services, buying them before December 31 rather than waiting until January can be advantageous.

Defer income: If you can delay invoicing a large project until January 2027, you push the income into 2027, reducing your 2026 tax bill.

Maximize retirement contributions: Solo 401(k) contributions let you defer up to $24,500 as an employee deferral ($31,000 if age 50 or older).

SIMPLE IRA contributions max out at $17,000 ($20,500 if age 50 or older). SEP IRA contributions reach up to 25% of compensation with a $69,000 cap for 2026.

Review entity structure: If you operate as a sole proprietor but your income exceeds $100,000, consider electing S corporation status for 2027. The structure lets you split income between salary (subject to payroll taxes) and distributions (not subject to payroll taxes), potentially saving $5,000 to $15,000 annually in self-employment taxes.

Energy efficiency deadline: The Section 179D energy-efficient commercial buildings deduction ends for projects beginning construction after June 30, 2026. If you own your office building and plan energy efficiency upgrades, start before June 30 to claim up to $5 per square foot in deductions.

Planning Throughout the Year

Tax planning tends to work better when spread throughout the year rather than compressed into the weeks before filing. Reviewing estimated tax payments quarterly, tracking mileage and expenses regularly, and timing major purchases strategically can all contribute to better outcomes.

California professional service businesses often face complex tax situations—multiple income streams, partnership structures, equipment purchases, and shifting regulations. The 2026 changes create planning opportunities worth exploring with sufficient lead time.

If you need help navigating 2026 deductions, structuring quarterly payments, or building a year-end tax plan, schedule a consultation. We work with professional service business owners across California to minimize taxes and eliminate surprises.

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