Small Business Tax Planning Under the New Law: What California Owners Need to Know in 2026

National Small Business Week (May 3–9, 2026) arrives at a moment when the federal tax code has been rewritten in ways that directly benefit — and complicate — the lives of small business owners. The One Big Beautiful Bill Act (OBBBA) made permanent several critical provisions, restored others, and introduced new wrinkles that every California business owner needs to understand.

At The Law Office of Pietro Canestrelli, we work with small business owners across Temecula, San Diego, Riverside, San Bernardino, and throughout California on business law and tax planning. Whether you run a sole proprietorship, LLC, S-corp, or C-corp, here’s what the new law means for your business in 2026 and beyond.

The QBI Deduction Is Now Permanent

The 20% Qualified Business Income (QBI) deduction under Section 199A was set to expire at the end of 2025. The OBBBA made it permanent — a major win for pass-through business owners (sole proprietors, partners, S-corp shareholders, and LLC members).

The QBI deduction allows eligible business owners to deduct up to 20% of their qualified business income from their individual tax return. For a business generating $200,000 in net income, that’s a $40,000 deduction — worth $8,800 to $14,800 in federal tax savings depending on bracket.

Key rules that remain in effect:

• The deduction phases out for specified service trades or businesses (SSTBs) — including law, accounting, consulting, health, and financial services — above $191,950 (single) or $383,900 (joint) for 2026
• For non-SSTBs above those thresholds, the deduction is limited by the greater of 50% of W-2 wages paid or 25% of W-2 wages plus 2.5% of qualified property
• The deduction is taken at the individual level — it doesn’t reduce self-employment tax

If your business is approaching the SSTB phase-out threshold, strategic income management — such as maximizing retirement contributions, timing expenses, or restructuring compensation — can preserve the deduction. Our tax planning guide explains who benefits most from proactive planning.

100% Bonus Depreciation Is Fully Restored

One of the most impactful OBBBA provisions for capital-intensive businesses: 100% first-year bonus depreciation is back and permanent. Under the TCJA, bonus depreciation had been declining — 80% in 2023, 60% in 2024, 40% in 2025. The OBBBA restored it to 100% retroactive to January 20, 2025.

This means you can deduct the full cost of qualifying assets — equipment, machinery, vehicles, certain building improvements — in the year they’re placed in service. No multi-year depreciation schedule. The entire expense hits your return in year one.

Critical California warning: California does not conform to federal bonus depreciation. The state follows its own depreciation schedule, which means you’ll claim different amounts on your federal and state returns. This creates a permanent state-federal difference that must be tracked year over year. Our Section 179 deduction page covers an alternative depreciation strategy that California does partially conform to.

Section 179 Limits Have Expanded

The OBBBA increased the Section 179 expensing limit and expanded the categories of property that qualify. Section 179 allows businesses to deduct the full purchase price of qualifying equipment and property in the year of purchase, subject to an annual limit.

The expanded limits mean more small businesses can fully expense capital purchases without needing to rely on bonus depreciation — which matters especially in California where bonus depreciation isn’t available.

Property that now qualifies for Section 179 treatment under the OBBBA includes certain qualified improvement property (QIP), such as interior improvements to non-residential buildings — a category that has had a complicated legislative history since the TCJA.

The Child and Dependent Care Credit Got a Major Boost — for Employers

The OBBBA dramatically expanded the employer credit for providing childcare assistance to employees. Businesses that establish or maintain qualified childcare facilities can claim credits of up to $500,000 to $600,000 — a substantial incentive for larger small businesses to invest in employee childcare benefits.

Additionally, the dependent care Flexible Spending Account (FSA) contribution limit was increased. For small business owners competing for talent in tight California labor markets, offering childcare benefits has become a tax-advantaged recruiting tool.

No-Tax-on-Tips and Overtime: What Business Owners Need to Know

While the no-tax-on-tips and no-tax-on-overtime deductions benefit employees, business owners should understand how they work for two reasons:

• Employee relations: Your tipped and overtime-eligible employees may have questions about how to claim these deductions. Being informed about the rules (and California’s nonconformity) positions you as a knowledgeable employer.
• Payroll implications: These deductions do not affect payroll taxes — FICA, FUTA, and California payroll taxes still apply to tips and overtime. The deductions are claimed on employees’ individual returns, not through payroll.

For California restaurant owners, read our article on no-tax-on-tips in California for a detailed breakdown. For guidance on overtime rules and how they interact with business taxes, see our piece on OBBBA overtime changes for business owners.

Tariff Impacts on California Small Businesses

While not strictly a tax law issue, the current tariff environment is creating significant cost pressures for California small businesses that import materials, components, or finished goods. The average effective tariff rate is approximately 12%, adding roughly $3,800 per household in costs — costs that flow through to businesses as higher input prices.

Tax strategies that can help offset tariff impacts include:

• Accelerating depreciation on equipment purchases (100% bonus depreciation or Section 179) to offset higher costs
• Evaluating R&D tax credits for businesses developing domestic alternatives to imported components
• Maximizing the QBI deduction to reduce effective tax rates on business income
• Exploring tariff-related duty drawback programs for businesses that re-export imported materials

Our article on tax strategies for managing tariffs provides additional detail.

California’s PTE Election: Still the Most Powerful SALT Tool

We covered this in our SALT cap analysis, but it bears repeating for business owners: the California Pass-Through Entity elective tax (at 9.3%) remains the single most powerful state tax reduction strategy for qualifying businesses.

The election is available to S-corps, partnerships, and LLCs taxed as partnerships. It’s been extended through 2030, and the June 15 prepayment deadline means now is the time to evaluate whether the election makes sense for your entity.

If you haven’t made the PTE election before, the process involves entity-level consent and timely payment. Our team can walk you through the requirements and help you model the tax savings.

Entity Selection Matters More Than Ever

The combination of permanent QBI deduction, restored bonus depreciation, the PTE election, and the SALT cap increase has changed the math on entity selection for many California businesses. A quick comparison:

• Sole Proprietorship: Simplest structure but no PTE election, no reasonable compensation planning, and self-employment tax on all net income. May work for very small or part-time businesses.
• LLC (taxed as partnership): PTE election available, QBI deduction available, but members pay self-employment tax on active income. California’s $800 minimum franchise tax applies regardless of income.
• S-Corporation: PTE election available, QBI deduction available, and the ability to split income between salary (subject to payroll taxes) and distributions (not subject to payroll taxes) can save thousands annually. Requires reasonable compensation and more administrative overhead.
• C-Corporation: Flat 21% federal rate, no QBI deduction, but no pass-through of income to individual rates. Best for businesses retaining significant earnings. Double taxation on distributions remains a consideration.

For a deeper comparison, read our articles on S-corporations, LLCs, and C-corporations.

Compliance Calendar for California Business Owners

• April 15: Q1 federal estimated tax; Q1 California estimated tax (30%)
• May 15: Nonprofit Form 990 deadline
• June 15: Q2 federal estimated tax; Q2 California estimated tax (40%); PTE prepayment; LLC estimated fee
• September 15: Q3 federal estimated tax; Extended S-corp and partnership return deadline; California: No Q3 estimated payment due
• October 15: Extended individual and C-corp return deadline
• January 15, 2027: Q4 federal estimated tax; Q4 California estimated tax (30%)

Plan Now, Save Later

National Small Business Week is the perfect reminder that tax planning isn’t a December-only activity. The businesses that pay the least in taxes — legally — are the ones that plan throughout the year, making strategic decisions about depreciation, retirement contributions, entity structure, and estimated payments as conditions change.

At The Law Office of Pietro Canestrelli, we help small business owners across Temecula, San Diego, Riverside, San Bernardino, and throughout California build tax strategies that work for their specific situation. From entity formation to audit defense, our team understands the unique challenges facing California businesses.

Ready to build a tax strategy for your business? Contact our office to schedule a business tax planning consultation.