Year-End Planning Tips

Effective tax planning can accomplish much more than just saving income taxes for the current and future years. If done properly, it can maximize the amount of funds you will have available for retirement, reduce the cost of financing your children’s education, reduce eventual estate taxes, and assist you in managing your cash flows to help you meet your financial objectives. In this first chapter of EisnerAmper’s 2026 Tax Guide, we’ll discuss tips and strategies for year-end.  

In some years your tax planning goals may include deferring some of your current year’s tax liability to a future year, thereby freeing up cash for investment, business, or personal use. This can be accomplished by timing when certain expenses are paid or controlling when income is recognized. Tax planning allows you to take advantage of tax rate differentials between years. However, if tax rates rise in a subsequent year, it might make sense to consider accelerating income into the current tax year. It is important to consider all facts and circumstances when doing tax planning.

Tax Planning Goals

Proper tax planning can achieve the following goals:

• Reduce the current year’s tax liability.
• Defer the current year’s tax liability to future years, thereby increasing availability of cash for investment, business, or personal needs.
• Reduce any potential future years’ tax liabilities.
• Maximize the tax savings from allowable deductions.
• Minimize the effect of the AMT on this year’s tax liability.
• Maximize tax savings by taking advantage of available tax credits.
• Maximize the amount of wealth that stays in your family.
• Minimize capital gains tax.
• Minimize the Medicare Contribution Tax on net investment income.
• Avoid or minimize any unfavorable tax results such as IRC Sec. 461(l) excess business loss limitations.
• Avoid penalties for underpayment of estimated taxes.
• Manage your cash flow by projecting when tax payments will be required.
• Minimize potential future estate taxes to maximize the amount transferred to your beneficiaries and/or charities.
• Maximize the amount of money you will have available to fund your children’s education as well as your retirement.

Tax Law Changes Impacting 2025 and Beyond

Public Law 119-21, commonly referred to as the “One Big Beautiful Bill Act” (OBBBA), made significant changes to the Internal Revenue Code (IRC). The law made several provisions of the Tax Cuts and Jobs Act of 2017 (TJCA) permanent, in many instances with modifications. It also created new sections of the IRC, introduced several temporary provisions, and dramatically altered or terminated many energy credits.

The bill made the following changes to TCJA provisions: 

• The increased standard deduction is made permanent, with further temporary increases for tax years 2025-2028.
• The current tax rates are made permanent, with the top rate remaining at 37%.
• The qualified business income deduction is made permanent, with a new minimum deduction of $400 for taxpayers with at least $1,000 of qualified business income.
• The mortgage interest deduction limitation is made permanent.
• Miscellaneous itemized deductions are permanently disallowed.
• The increased estate and gift tax exemption amount is made permanent and further increased to $15 million.
• The state and local tax (SALT) deduction limitation is made permanent, and temporarily increased to $40,000 ($20,000 if married filing separately) for tax years 2025-2028, subject to AGI limitations.
• Personal exemptions are permanently suspended.
• The increased AMT exemptions are made permanent, but are decreased from 2025 levels due to a change in the date of inflation adjustments.
• The 60% AGI limitation on the charitable deduction for cash contributions is made permanent, but new restrictions on charitable deductions are introduced (discussed below).
• The limitation on excess business losses for non-corporate taxpayers is made permanent, and the limitation is reduced from 2025 levels due to a change in the inflation adjustment.
• The Child Tax Credit is permanently increased to $2,200. 

The following new provisions are temporary for tax years 2025-2028: 

• A $6,000 deduction for each individual over the age of 65 years, subject to AGI limitations, available for both itemizers and non-itemizers.
• A deduction for both itemizers and non-itemizers of up to $12,500 ($25,000 if married filing jointly) for qualified overtime compensation, subject to AGI limitations.
• A deduction for both itemizers and non-itemizers of up to $25,000, regardless of filing status, for qualified tip income, subject to AGI limitations.
• A deduction for interest paid for a loan on a vehicle that was assembled in the U.S., subject to AGI limitations.

The following provisions are permanent: 

• An increase in both the exclusion amount (from $10 million to $15 million) and the assets amount (from $50 million to $75 million) for qualified small business stock (QSBS), and new tiered holding periods for reduced percentages to be excluded. 
• A new limitation on the value of itemized deductions for taxpayers who are in the highest tax bracket, which could reduce the amount of allowable itemized deductions by up to 5.41%. 
• New IRC Sec. 174A revives full expensing for domestic research and development expenditures for tax years beginning after December 31, 2024, allows small businesses to amend 2022-2024 returns to deduct these expenses, and allows all businesses to deduct unamortized expenses in 2025 or 2025 and 2026. 
• OBBBA revives 100% bonus depreciation for property placed in service after January 19, 2025.
• For tax years beginning after December 21, 2024, the new law revives the use of earnings before interest, taxes, depreciation, and amortization (EBITDA) for purposes of determining the business interest expenses deduction limitation under IRC Sec. 163(j).  
• For tax years beginning after December 31, 2024, IRC Sec. 179 limits are increased to $2.5 million, with the phase-out threshold increased to $4 million. 
• A .5% AGI threshold is introduced that individual taxpayers must exceed before they can deduct their charitable contributions. 
• An above-the-line deduction of $1,000 ($2,000 if married filing jointly) is created for charitable contributions made by non-itemizers.
• A credit of up to $1,700 is created for qualified cash contributions made to a scholarship granting organization, starting in 2027.

On August 16, 2022, Congress passed the Inflation Reduction Act (“IRA”) as part of efforts to lower the cost of living for American families and confront the climate crisis. However, the OBBBA made significant changes to many of the credits, including: 

• The Clean Vehicle and Used Clean Vehicle Credits were terminated for vehicles purchased after September 30, 2025.
• The Energy Efficient Home Improvement and Residential Clean Energy Credits will be terminated after December 31, 2025.
• The New Energy Efficient Home and Alternative Vehicle Refueling Credits will be terminated after June 30, 2026.

The “HOMES” (Homeowner Managing Energy Savings) Rebate program offers rebates up to $8,000 and the “High-Efficient Electric Home Rebate Act” offers rebates of $14,000 to qualified taxpayers. These were not terminated by the OBBBA and run until September 30, 2031.

Under COVID-era legislation, required minimum distributions (RMDs) from individual retirement accounts were not required for years 2021 to 2024 for anyone who inherited an IRA from someone who passed away on or after January 1, 2020. After a four-year pause, this annual RMD requirement resumed in 2025, and beneficiaries will still need to distribute the entire account within ten years of inheriting.

The changes made by the OBBBA will require guidance from the IRS to be implemented. To date, there has not been significant guidance on these provisions. However, over the next few months, new regulations, notices, and Revenue Procedures are expected to be released to help taxpayers and their advisors navigate the new law.

Alternative Minimum Tax

The alternative minimum tax (AMT) is intended to prevent high income taxpayers from paying significantly reduced tax rates as a result of having high capital gains or other tax-preferred income. The top AMT rate is 28%. As a result of the TCJA and the OBBBA, the AMT has affected less taxpayers than in past years, so some of the tax strategies utilized in prior years will no longer be applicable. See Chapter 4, Alternative Minimum Tax, for more information.

The key factors you should still consider when identifying strategies to minimize your AMT are:

• Prior to 2018, while residents of states with high income and property taxes (such as New York, California, Connecticut, Pennsylvania, and New Jersey) were able to deduct the full amount of state income and property taxes against federal taxable income, they most likely did not receive a benefit if they were subject to the AMT. Beginning after December 31, 2024, state income and property tax deductions are limited to $40,000 and the deductions continue to be subject to the AMT. It is now less likely that the AMT will apply to many taxpayers. However, many states and New York City now allow business entities to pay a state pass-through entity tax (PTET) to get around the limitation. For more details on PTET, see Chapter 19, State Tax Issues. 
• In addition to the limitations on state income and property taxes, miscellaneous itemized deductions such as investment expenses, unreimbursed business expenses, and professional fees are no longer deductible.
• The current top long-term capital gains tax rate is 20%. Including the additional 3.8% Medicare Contribution Tax on net investment income, the top federal long-term capital gains rate could be 23.8% and the top federal short-term capital gains tax rate could be as much as 40.8% in 2024. 
• Taxpayers may defer tax on prior short-term and/or long-term capital gains if the amount of the gain is invested in a qualified opportunity fund (QOF), and investors have been encouraged in prior years to reinvest their capital gains into areas that need investment (qualified opportunity zones or QOZs). While the OBBBA made the QOF and QOZ program permanent, all gains from investments made before January 1, 2027, will be deemed realized on December 31, 2026. Taxpayers should carefully consider all aspects of planning regarding QOZs and QOFs before January 1, 2027. See Chapter 6, Capital Gains and Dividend Income, for more information.

Under current law, the complex netting rules have the potential effect of making your long-term capital gains subject to short-term rates, so you must carefully time your security trades to ensure that you receive the full benefit of the lowest capital gains tax rate. See Chapter 6, Capital Gains and Dividend Income for more information. 
 
Gift and estate taxes can reduce the amount your beneficiaries will receive by 40% to 50%, depending on which state you are a resident of at date of death. However, there are planning techniques and strategies available to maximize the amount of wealth that is preserved for your family. See Chapter 15, Estate and Gift Tax Planning, for more information.

Tax Tip 1

Key Tax Planning Strategies

Year-End Tax Planning Tips 

Tax Tip 1 provides a snapshot of key strategies geared toward helping you achieve your planning goals. It includes ideas to help you reduce your current year’s tax as well as any potential future taxes. While this chart is not all-inclusive, it is a good starting point to help you identify planning ideas that might apply to your situation. Keep in mind that many of the strategies involve knowing what your approximate income, expenses, and tax rates will be for the current and subsequent years and then applying the applicable tax law for each year to determine the best path to follow. Implementation of many of these ideas requires a thorough knowledge of tax laws, thoughtful planning, and timely action. 

Timing when you pay deductible expenses and when you receive income (to the extent you have control) can reduce your taxes. Timing expenses and income can also defer some of your tax liability to next year (or even later years), giving you use of your money during the deferral period.

To gain the maximum benefit, you need to project your estimated taxable income for the current and subsequent years as best you can. This will help you identify your expected top tax bracket for each year. Your year-to-date realized long- and short-term capital gains and losses should be included in your projections. Be sure to consider prior-year loss carryforwards (if any). Based on these results, you can decide what steps to take prior to year-end. You will be able to decide whether you should prepay deductions and defer income, defer expenses and accelerate income, realize capital losses, or lock in capital gains.  

In some situations, it might make sense for a taxpayer who expects to be taxed at a higher rate in the following year to accelerate income and defer deductions. These could include: 

• A preferential filing status of head-of-household or surviving spouse will end after the current year.
• The taxpayer is single in the current year but will be married in the following year and therefore may be subject to the marriage penalty.
• The taxpayer was unemployed or a student for a majority of the current year but expects to be employed in the following year.

The income brackets for tax rates are adjusted for inflation each year. If a taxpayer finds themselves in a lower tax bracket in the following year due to inflation increases, they might want to defer income and accelerate deductions, such as:

• A preferential filing status of head-of-household or surviving spouse will be available in the following year.
• The taxpayer is married in the current year and subject to the marriage penalty but will be divorced in the following year.
• The taxpayer is employed during the current year but expects to retire in the following year.

Tax Tip 2 offers basic guidance for deciding when to prepay or defer deductible expenses and when to defer or collect taxable income.

Tax Tip 3 offers steps to follow relating to realized capital gains and/or losses, and the type of gains and losses you should trigger.

Expenses You Can Prepay

Here are the most common deductible expenses you can easily prepay by December 31, if appropriate:

Charitable Contributions

As part of the TCJA, individual itemizers were allowed to deduct up to 60% of their AGI for cash donations to qualified charities. The OBBBA made this change permanent. Non-cash contributions (such as clothing and household goods) to qualifying organizations continue to be capped at 50% of AGI, while contributions of appreciated capital gain property are capped at 30% of AGI (20% in certain situations). Be sure to carefully work through the calculations, as gifting different types of property to charities with varying exempt status (such as private foundations or public charities) can limit the amount of the deduction allowed in a particular year. See Chapter 12, Charitable Contributions, for more information.

Tax Tip 2

AMT Tax Planning Strategies

Legend = Prepay before the end of the current year/Defer into next year or later/Collect before the end of the year.

*The chart assumes your regular tax rate on ordinary income is higher than the maximum AMT tax rate of 28%.

State and Local Income Taxes and Property Taxes 

A taxpayer may claim an itemized deduction of up to $40,000 ($20,000 for married filing separately) for the aggregate of:

1. state and local income taxes and
2. state and local property taxes paid.  

This is reduced once the taxpayer’s AGI exceeds $500,000 ($250,000 for married filing separately), with the highest earning taxpayers limited to a deduction of $10,000 ($5,000 if married filing separately). See Chapter 19, State Tax Issues, for more information.

Miscellaneous Itemized Deductions

Miscellaneous itemized deductions subject to the limitation of 2% of AGI were suspended under the TCJA and permanently eliminated under the OBBBA.

Mortgage Interest

Before the end of the year, consider prepaying your mortgage payment for next January in the current year to accelerate the deduction.

Margin Interest

Be sure to pay any margin interest, since interest accrued at year-end is only deductible if actually paid. This may also reduce the Medicare Contribution Tax on net investment income.

Business Equipment

Consider accelerating the purchases of business equipment to take advantage of expensing allowances, subject to certain limitations. To qualify, the property must be placed in service in the year of the intended deduction. The OBBBA permanently reinstated the 100% deduction for qualified property placed in service after January 19, 2025. Property placed in service before January 20, 2025, is limited to 40% bonus depreciation.

Tax Tip 3

Year-End Capital Gains and Losses

Note: If you are married filing separately, substitute $1,500 for $3,000 in the above tip.

Income You Can Accelerate or Defer

Timing income can be more difficult than timing deductions, but here are some types of income that you may be able to control the timing of receipt so you can gain the advantage of having the income taxed in a year that you are in a lower tax bracket.

Cash Salaries or Bonuses

If you anticipate your current year’s income tax rate to be lower than next year’s rate, you can accelerate salary or bonuses into the current year. You would need to determine if there are strict limitations on amounts that can be accelerated. However, if next year’s rate is lower than your current year’s rate, it may make sense to defer such income until next year provided the income is not constructively received (made available to you in the current year). 

Consulting or Other Self-Employment Income

If you are a cash-basis business and you anticipate your current year’s tax rate to be lower than next year’s rate, you can accelerate income into the current year. Otherwise, you should consider deferring such income.

Retirement Plan Distributions

If you are over age 59½ and your tax rate is low this year, consider taking a taxable distribution from your retirement plan even if it is not required or consider a Roth IRA conversion. For tax year 2025, individuals of at least age 70½ are allowed to make tax-free distributions of up to $100,000 from individual retirement accounts directly to public charities. For tax year 2026, up to $105,000 of tax-free distribution is allowed. This allows an individual to exclude the distribution from income, thereby reducing your state income taxes in states that limit or disallow the charitable contribution deduction.
 
The SECURE 2.0 Act changed the timing by which you must withdraw your first required minimum distribution. If you turn 72 after December 31, 2022, you are not required to take the first RMD until you reach age 73. For those turning 74 on or after January 1, 2033, the RMD age will be increased to 75. See Chapter 14, Retirement Plans, for further information.

Retirement Plan Contributions and Deductible IRA Contributions

Adjust the timing of deductible retirement plan or IRA contributions to reduce income in a year when you expect your tax rate to be higher.

Health Savings Accounts 

Consider which year to make deductible health savings account contributions.

Capital Gains

The following ideas may lower your taxes this year: 

• If you have unrealized net short-term capital gains, consider selling the positions and realize the gains in the current year if you expect next year’s tax rate to be higher. Only consider this strategy if you do not otherwise intend to hold the position for more than 12 months, making it eligible for the long-term capital gain rate of 20%, exclusive of the additional Medicare Contribution Tax. However, you may be able to apply the netting rule which may result in the offsetting of long-term losses to short-term gains, resulting in a tax savings of 37% in 2026 rather than 20%.  
• Review your portfolio to determine if you have any securities that you may be able to claim as worthless, thereby giving you a capital loss before the end of the year. A similar rule applies to bad debts. 
•  Avoid wash sales. Loss recognition is disallowed if the same or substantially identical security is purchased 30 days before or after the sale of the security that created the loss. 
• Conversely, generate wash sales and/or constructive sales to adjust realized gains and losses to a more beneficial year.
• Consider a bond swap to realize losses in your bond portfolio. This swap allows you to purchase similar bonds and avoid the wash-sale rule while maintaining your overall bond positions.
• Similarly, you may consider selling securities this year to realize long-term capital gains that may be taxed at the more favorable rate this year, and then buying them back to effectively gain a step-up in basis. Since the sales are at a gain, the wash-sale rules do not apply.

Real Estate and Other Non-Publicly Traded Property Sales

If you are selling real estate or other non-publicly traded property at a gain, you would normally structure the terms of the arrangement so that most of the payments would be due next year. You can use the installment sale method to report the income. This would allow you to recognize only a portion of the taxable gain in the current year to the extent of the payments you received, thereby allowing you to defer much of that tax to future years. See Chapter 10, Passive and Real Estate Activities, for more information.

U.S Treasury Bill Income

If you have U.S. Treasury Bills maturing early next year, you may want to sell these bills to recognize income in the current year if you expect to be in a lower tax bracket this year than next year. 

Installment Sale Income

Consider the timing of installment sales and the recognition of income currently if a lower tax bracket is expected.

Sale of Principal Residence

Determine which year would be most beneficial to sell your principal residence and claim the $250,000 exclusion ($500,000 if you are filing joint returns). See Chapter 11, Principal Residence Sale and Rental, for more details.

Bunching Deductions

Medical Expenses

Unreimbursed medical expenses are permanently deductible to the extent they exceed 7.5% of AGI. Therefore, bunching unreimbursed medical expenses into a single year could result in a tax benefit. Medical expenses include health insurance and dental care. If you are paying a private nurse or a nursing home for a parent or other relative, you can take these expenses on your tax return even if you do not claim the parent or relative as your dependent, provided you meet certain eligibility requirements.

Charitable Contributions

The OBBBA made the limitations and eliminations of many itemized deductions under the TCJA permanent. At the same time, the standard deduction has increased substantially. Generally, the deduction for charitable contributions is the exception, but the OBBBA introduced new restrictions even on this deduction.
 
An individual can deduct the larger of either their standard deduction or itemized deductions. Thus, to maximize the deduction for charitable contributions, it might be best to bunch gifts to charities in one year, so the individual’s charitable contributions exceed the standard deduction amounts and they will be able to itemize. Similarly, funding a donor-advised fund, private foundation, or charitable trust in a particular year may be effective in maximizing the tax benefit of such charitable deductions. With the new .5% floor and IRC Sec. 68 limitation on itemized deductions, bunching may be even more attractive for certain taxpayers. See Chapter 12, Charitable Contributions, for more information.

Tax Tip 4 shows the potential benefits of bunching charitable deductions.

Adjust Year-End Withholding or Make Estimated Tax Payments

Taxpayers who receive income in an uneven manner during the year may have difficultly estimating their tax throughout the year. If you expect to be subject to an underpayment penalty for failure to pay your current-year tax liability on a timely basis, consider increasing your withholding and/or make an estimated tax payment between now and the end of the year to eliminate or minimize the amount of the penalty. See Chapter 3, Estimated Tax Requirements, for more information.

Utilize Business Losses or Take Tax-Free Distributions

It may be possible to deduct losses that would otherwise be limited by your tax basis or the “at risk” rules. You may also be able to take tax-free distributions from a partnership, limited liability company (LLC) or S corporation if you have tax basis in the entity and have already been taxed on the income. If there is a basis limitation, consider contributing capital to the entity or making a loan under certain conditions.

Passive Losses

If you have passive losses from a business in which you do not materially participate that exceed your income from these types of activities, consider disposing of the activity. The tax savings can be significant since all losses become deductible when you dispose of the activity. Even if there is recognized gain on the disposition, you can receive the benefit of having the long-term capital gain taxed at 23.8% (28.8% if the gain is subject to depreciation recapture) with all the previously suspended losses offsetting ordinary income at a potential tax benefit of 40.8% in 2025, inclusive of the Medicare Contribution Tax. See Chapter 10, Passive and Real Estate Activities, for more information.

Incentive Stock Options

Review your incentive stock option (ISO) plans prior to year-end. A poorly timed exercise of ISOs can be very costly since the spread between the fair market value of the stock and your exercise price is a tax preference item for AMT purposes. If you are in the AMT, you will have to pay a tax on that spread, generally at 28%. If you expect to be in the AMT this year but do not project to be next year, you should consider deferring the exercise. Conversely, if you are not in the AMT this year, you should consider accelerating the exercise of the options; however, keep in mind to not exercise so much as to be subject to the AMT. See Chapter 7, Stock Options, Restricted Stock, and Deferred Compensation for more information.

Estate Planning

If you have debt that can be traced to your business expenditures – including debt used to finance the capital requirements of a partnership, S corporation or LLC involved in a trade or business in which you materially participate – you can deduct the interest “above-the-line” as business interest rather than as an itemized deduction. The interest is a direct reduction of the income from the business. This allows you to deduct all of your business interest, even if you are a resident of a state that limits or disallows all of your itemized deductions.

Furthermore, because of the increased cumulative BEA in 2024, you were allowed to make additional gifts to fully utilize such exclusion of $13.99 million ($27.98 million for married couples). For 2026, these amounts will increase to $15 million ($30 million for married couples). When combined with other estate and gift planning techniques, you may mitigate estate and gift taxes and transfer a great deal of wealth to other family members (who may be in a lower income tax bracket or may need financial assistance). See Chapter 15, Estate and Gift Tax Planning, for more information.

Note: The amount of the lifetime gift exclusion is adjusted annually for the chained consumer price index (“CPI”).

Tax Strategies for Business Owners

Timing of Income and Deductions

If you are a cash-basis business and expect your current year’s tax rate to be higher than next year’s rate, you can delay billing until January of next year for services already performed to take advantage of the lower tax rate next year. Similarly, even if you expect next year’s rate to be the same as this year’s rate, you should still delay billing until after year-end to defer the tax to next year. You also have the option to prepay or defer paying business expenses to realize the deduction in the year that you expect to be subject to the higher tax rate. This can be particularly significant if you are considering purchasing (and placing in service) business equipment. . See Chapter 5, Business Owner Issues and Depreciation Deductions, for more information on the following business topics.

Business Equipment

For 2025, the IRC Sec. 179 deduction is capped at $2,500,000 and begins to phase out at $4,000,000. The OBBBA permanently reinstated 100% bonus depreciation for property placed in service after January 19, 2025. Property placed in service between January 1, 2025, and January 19, 2025, is still subject to the reduced bonus percentages. The TCJA expanded the definition of qualified property to include used property, provided that the taxpayer did not use the property prior to the purchase.

Note: Some businesses may not be eligible for bonus depreciation. For example, bonus depreciation is not allowed for certain real estate businesses with average annual gross receipts of more than $31 million for the prior three years, subject to inflation adjustment, that elect to deduct 100% of their business interest expenses.

Note: The bonus depreciation is an addback on most state returns while IRC Sec. 179 expense is only a partial addback.

Note: Some states may not allow bonus depreciation.

Business Interest

If you have debt that can be traced to your business expenditures – including debt used to finance the capital requirements of a partnership, S corporation or LLC involved in a trade or business in which you materially participate – you can deduct the interest “above-the-line” as business interest rather than as an itemized deduction. The interest is a direct reduction of the income from the business. This allows you to deduct all of your business interest, even if you are a resident of a state that limits or disallows all of your itemized deductions.

Business interest also includes finance charges on items that you purchase for your business (as an owner) using the company’s credit card. Credit card purchases made before year-end and paid for in the following year are allowable deductions in the current year for cash basis businesses.

Note: Interest expense deduction is limited to 30% of adjusted taxable income (ATI). Beginning in 2025, depreciation, amortization, and depletion are once again included int the calculation of ATI. Such limitation does not apply to:

• Businesses with gross receipts that do not exceed $31 million for 2025.
• Electing real property trade or business.

Note: Disallowed business interest deduction is carried over to the next year subject to that year’s limitation.

Qualified Business Income Deduction

Qualified business income (QBI) is generally defined as net income and deductions that are effectively connected to a U.S. business.  IRC Sec. 199A allows a deduction for sole proprietors and owners of pass-through entities of a “qualified” business generally equal to 20% of qualified business income, subject to various loss and deduction limitations. The OBBBA created a minimum deduction of $400 for taxpayers with at least $1,000 in QBI. Though this deduction is not allowed in calculating the owner’s AGI, it does reduce the taxable income.

Excess Business Losses (EBLs) and Net Operating Losses (NOLs)

Excess losses from all of your trades or businesses for 2025 are limited to $626,000 (married filing jointly) and $313,000 (all others). Beginning in 2026, these losses are limited to $512,000 (married filing jointly) and $256,000 (all others). Any losses above these amounts will be carried forward as an NOL. NOLs arising in tax years ending after 2020 cannot be carried back and can only be carried forward. NOLs can offset up to 80% of taxable income in future years with any excess to be carried forward indefinitely.

Note: The OBBBA changed the date from which the base limitation amounts of $500,000 and $250,000 are increased for inflation from 2018 to 2025 for tax years beginning after December 31, 2025. Accordingly, the threshold for the limitation was dramatically reduced beginning in 2026.

Research and Development (R&D) Capitalization

Effective January 1, 2022, R&D expenditures under IRC Sec. 174 were required to be capitalized as opposed to expensed. Expenditures for research conducted in the U.S. were amortized over five years, while expenditures for research conducted outside the U.S., were amortized over 15 years. The OBBBA created IRC Sec. 174A, which allows for the immediate expensing of domestic R&D expenditures only. Small businesses may amend their 2022-2024 returns by July 5, 2026, to retroactively deduct these expenses. See Chapter 5, Business Owner Issues and Depreciation Deductions, and Chapter 16, Tax Credits, for more information.

Pass-Through Entity Tax

The TCJA limited the itemized deduction of state income and real estate tax to $10,000. The OBBBA made this limitation permanent, with temporary increases for tax years 2025-2028. To circumvent this limitation, many states have adopted elective pass-through entity taxes (PTETs). The PTET is an optional state income tax payment subject to a timely annual election. It allows an entity to pay state income and property tax and deduct the payments to offset the business’ gross income without limitation at the federal level.  This reduces the partners’ allocated income from the entity. In general, each partner and shareholder of the pass-through entities that paid the PTET will receive a credit against their state individual income tax liability. However, some states may not allow the payments as a credit but instead will allow the deduction to offset their distributive share of income from their state adjusted gross income in determining their state income tax liability. See Chapter 19, State Tax Issues, for more information.

Note: Depending on the state, the PTET tax could be an addback to a state’s adjusted gross income in determining state income tax liability.