Mid-Year Tax Planning for Business Owners: The Moves That Matter in the Second Half of 2026

Most business owners think about taxes in February, when their accountant calls asking for documents, or in April, when the check is written. By then, nearly every significant planning opportunity for the prior year has already expired. The window for reducing what you owe is almost entirely in the current year, and the second half of the year is where most of that planning happens. For 2026, that window opened in July.

The legislative environment makes this year particularly important. The One Big Beautiful Bill Act permanently extended and in several cases expanded the tax provisions that matter most to business owners, including 100 percent bonus depreciation, the Section 199A qualified business income deduction at a 23 percent rate, and enhanced retirement plan contribution limits. These are not temporary provisions with phaseout schedules. They are permanent features of the tax code, and business owners who understand how to use them systematically will spend the rest of their careers compounding that advantage over those who do not.

This article covers eight planning moves that high-income business owners should be evaluating right now, while there is still enough time in 2026 to execute each of them properly.

1. Review Your Entity Structure Before Year-End Becomes the Deadline

Entity structure determines how self-employment tax applies to your business income, and for owners earning $300,000 or more from pass-through operations, the difference between the right and wrong structure can easily exceed $20,000 per year. A sole proprietor or single-member LLC taxed as a disregarded entity pays self-employment tax at 15.3 percent on net income up to the Social Security wage base and 2.9 percent above it. An S-Corporation allows the owner to pay reasonable W-2 compensation and treat remaining distributions as pass-through income not subject to self-employment tax.

Mid-year is the right time to evaluate this because an S-Corp election for the current tax year can be made retroactively to January 1 if filed before the deadline. Waiting until November or December compresses the timeline for setting up payroll, establishing the shareholder-employee relationship, and documenting reasonable compensation in a way the IRS will accept. A business generating $500,000 in net income may find that paying $120,000 in W-2 salary and treating the remainder as distributions saves $25,000 to $35,000 in self-employment taxes annually, every year going forward. That is a structural change worth prioritizing in July rather than October.

2. Establish or Fund a Defined Benefit or Cash Balance Plan

For business owners over 45 with consistent income and limited employees, a cash balance plan stacked with a 401(k) profit sharing arrangement can shelter $200,000 to $350,000 in pre-tax income annually. Cash balance plans are funded by an actuary who determines the required annual contribution to fund a target retirement benefit. Every dollar contributed reduces taxable income dollar-for-dollar under IRC Section 404.

The critical timing constraint is that the plan must be established by December 31 of the tax year in which the deduction is claimed. That means a business owner who wants a cash balance plan deduction on their 2026 return needs to engage an actuary, complete the plan document, and make the initial contribution before December 31. Starting in July leaves adequate time to complete that process without rushing. Starting in November does not. Solo 401(k) plans have more flexibility and can be established up to the tax filing deadline, but the cash balance component, which provides the largest deductions for older, higher-income owners, must be in place by year-end.

3. Run a Cost Segregation Study on Every Property Acquired This Year

With permanent 100 percent bonus depreciation now in place under the OBBBA, every dollar of property reclassified through a cost segregation study into 5-year, 7-year, or 15-year MACRS categories is fully deductible in the year the property is placed in service. For a business owner who acquired a commercial building or rental property in 2026, the first-year deduction from a cost segregation study typically ranges from 25 to 40 percent of the total purchase price.

On a $1.2 million property, that is $300,000 to $480,000 in additional first-year deductions. At an effective tax rate of 37 percent, the cash value of that deduction is $111,000 to $178,000. The cost of the study is typically $5,000 to $15,000 for a property in this range. The math is straightforward and the opportunity is time-sensitive: the study needs to be ordered, completed, and reflected on the return for the year the property was placed in service. Waiting until tax season means scrambling to get a study done after the fact. Commissioning it now, with months remaining in the year, ensures the reclassification is documented and audit-ready.

Business owners who acquired properties in 2023 or 2024 without a cost segregation study should also evaluate lookback studies. The OBBBA's retroactive restoration of 100 percent bonus depreciation for the phasedown years means unclaimed accelerated depreciation from those years can be captured through a Form 3115 change in accounting method, taking the entire cumulative adjustment as a deduction in the current year.

4. Audit Your Accountable Plan and Make Sure It Is Actually Working

An accountable plan under Treasury Regulation 1.62-2 is one of the most consistently underutilized tools available to S-Corporation and C-Corporation owners. The plan allows the business to reimburse shareholder-employees for legitimate business expenses tax-free, converting costs the owner would otherwise pay out of pocket into corporate deductions. Home office, vehicle business use, professional development, tools, and technology expenses can all pass through an accountable plan, reducing both the corporation's taxable income and the owner's gross income simultaneously.

The problem is that most accountable plans exist on paper but are not actually being used. The owner pays expenses from personal accounts and never submits reimbursement requests to the corporation. By mid-year, reviewing the first six months of expenses and identifying reimbursable amounts is a straightforward exercise that generates real deductions. The plan must satisfy three requirements: there must be a business connection, the employee must substantiate the expense with documentation, and any excess advances must be returned. A properly administered accountable plan requires discipline but no additional cash outlay, since the reimbursement goes from the corporation to the owner and offsets the expense already paid.

5. Evaluate the Augusta Rule for Legitimate Home Rentals

IRC Section 280A(g) allows homeowners to rent their personal residence to a business for up to 14 days per year without including the rental income in personal gross income. The business deducts the rent paid as an ordinary business expense. If a business owner holds legitimate board meetings, strategy sessions, or business functions at their home and establishes a market rental rate using comparable venue pricing, payments of $3,000 to $6,000 per day for 14 days generate $42,000 to $84,000 in corporate deductions that pass through to the owner tax-free.

This provision is legitimate and IRS-sanctioned, but it requires careful execution. The business purpose for each rental must be documented, the rental rate must be supported by comparable third-party venue pricing in the same geographic area, and the payments must flow properly between the business and the individual. Done correctly, it is a straightforward planning tool. Mid-year is the right time to schedule the remaining rental days and ensure documentation practices are in place for each occurrence.

6. Check Your Q2 Estimated Tax Payment and Adjust for the Year

Underpayment penalties under IRC Section 6654 accrue quarterly based on actual tax liability. Business owners who had a strong first half of 2026, whether from increased revenue, a business sale, or a large capital event, may already be substantially underpaid relative to their projected annual liability.

The third quarter estimated payment is due September 15. That deadline is an opportunity to recalibrate based on actual year-to-date income, project the full-year liability incorporating planned deductions, and make a payment that avoids penalty accrual for the remainder of the year. Business owners who are also planning to execute retirement plan contributions, cost segregation studies, or other deductions in the second half of the year should build those estimates into the projection before paying. Overpaying estimated taxes is not a planning strategy.

7. Maximize the Section 199A QBI Deduction Through Income Timing

The qualified business income deduction under IRC Section 199A allows pass-through business owners to deduct 23 percent of qualified business income in 2026. For a business generating $400,000 in qualified income, that deduction is worth $92,000 before the limitation rules apply. However, the deduction phases out for owners of specified service trades or businesses above the taxable income thresholds, approximately $197,300 for single filers and $394,600 for joint filers in 2026.

Business owners near these thresholds benefit significantly from strategies that reduce taxable income, including retirement plan contributions, accountable plan reimbursements, and depreciation from cost segregation studies. Crossing the threshold by even a small amount can cost tens of thousands of dollars in lost QBI deductions. A mid-year income projection that maps current income against the threshold allows owners to identify how far they are from the limit, what reductions are achievable, and which combination of strategies produces the best outcome across income taxes, self-employment taxes, and the QBI deduction together.

8. Begin Planning Any Major Year-End Income Events Now

Business sales, large client payments, year-end bonuses, and asset dispositions all have tax consequences that can be shaped by planning decisions made months in advance. A business owner who expects to close a significant transaction before December 31 should be working with a tax advisor now to evaluate installment sale treatment under IRC Section 453, contribution strategies, entity structure at the time of sale, and the interaction of the gain with passive activity losses.

Timing decisions that take fifteen minutes to make before a transaction closes can take years to unwind afterward. A business owner who closes a $3 million asset sale on December 15 without any prior planning pays tax on the full gain in 2026. The same owner who begins planning in July might use installment sale treatment to spread gain recognition across multiple years, time the closing to maximize carryforward losses, or structure the transaction entirely differently. The window for that analysis is now.

---

Frequently Asked Questions

What is the most impactful mid-year tax move for a business owner in 2026?

For most high-income business owners, the single highest-impact move is evaluating whether a cash balance plan is appropriate. Contributions of $200,000 to $350,000 per year are possible depending on age and income, and every dollar contributed reduces taxable income directly. The second-highest impact move is typically a cost segregation study on investment real estate acquired this year, given that permanent 100 percent bonus depreciation allows full first-year expensing of reclassified components.

Can I still set up a retirement plan mid-year and get a deduction for 2026?

Yes. A Solo 401(k) or SEP-IRA can be established and funded up to the tax filing deadline including extensions. A cash balance plan generally needs to be established by December 31 of the tax year, so acting in July gives ample time to complete actuarial work and plan documentation before year-end.

Is mid-year a good time to evaluate entity structure?

Mid-year is actually ideal for entity structure review. If a business owner operating as a sole proprietor discovers that electing S-Corp status would save $20,000 to $40,000 in self-employment tax annually, an election can be made retroactively to January 1 of the current year if filed before the deadline. Waiting until December makes retroactive elections impractical.

How does the Accountable Plan help reduce taxes?

An accountable plan under Treasury Regulation 1.62-2 allows an S-Corp or C-Corp to reimburse shareholder-employees for legitimate business expenses including home office, vehicle, phone, and professional development tax-free. A properly documented accountable plan converts personal out-of-pocket expenses into corporate deductions and reduces both income tax and payroll taxes.

What triggers the QBI deduction phaseout and how can business owners avoid it?

For 2026, the Section 199A QBI deduction begins to phase out above approximately $197,300 in taxable income for single filers and $394,600 for joint filers. Business owners near these thresholds can reduce taxable income through retirement plan contributions, cost segregation losses, and accountable plan reimbursements to preserve or maximize the 23 percent deduction on pass-through income.

What is the Augusta Rule and is it still viable in 2026?

The Augusta Rule under IRC Section 280A(g) allows homeowners to rent their personal residence to their business for up to 14 days per year without reporting the rental income personally, while the business deducts the rent paid. For a business owner whose home could reasonably rent for $3,000 to $5,000 per day for legitimate business meetings, this can generate $42,000 to $70,000 in annual deductions. The rule remains fully valid in 2026 with proper documentation of business purpose and market-rate pricing.

---

This article is for informational purposes only and does not constitute legal or tax advice. Consult a qualified tax professional regarding your specific circumstances. AE Tax Advisors, 935 Lake Elmo Dr, Suite B, Billings, MT 59105. Phone: (631) 614-5762.