Business owners should consider these strategies to reduce their future taxes

Thanks to the tax and spending bill enacted in July, many small-business owners I know are moving forward with long-term strategies that will cut their corporate tax bills in the future.

The new tax law included more tax incentives for companies and made other substantial provisions permanent. Here are a few strategies to consider for your business.

The new tax law made permanent big deductions for capital equipment, and introduced a significant deduction for manufacturers building new facilities.

“Bonus depreciation” deductions — which were being scaled back over the past few years — are now permanent, and allow businesses to write off the costs of qualifying property when they’re put into use, according to Mitch Gerstein, a senior tax adviser at Isdaner & Co. LLC in Bala Cynwyd.

“Eligible items that may qualify include computer systems and software, office furniture, certain vehicles, and qualified improvement property,” he said. “This immediate expensing can significantly improve cash flow and lower taxable income, an especially valuable benefit for businesses investing in growth.”

Scott Jillard has been encouraging his clients to make new capital investments where it seems appropriate. His firm, Jillard & Associates in Media, helps businesses take advantage of available federal tax credit programs.

“This is significant for all commercial and investment property owners,” Jillard said. “It allows them to accelerate their depreciation schedules, which offsets income taxes from their rentals and encourages them to either improve their properties or add to their portfolio.”

For manufacturers, there is now a 100% deduction for qualified production property, which allows eligible companies to immediately deduct the entire cost of new facilities used in qualified production activities like manufacturing. To qualify, the property must be new, located in the U.S., and meet specific construction timelines, with office or administrative areas excluded.

“It’s important to take advantage of these tax deductions to help drive your top-line growth, while still minimizing your tax liability,” said Rich Petillo, a partner at Centri Business Consulting in Philadelphia.

Given the more favorable tax rules, many tax experts like Jillard are also recommending that their clients look more deeply into cost segregation.

Cost segregation is a tax strategy employed by purchasers of new commercial properties to increase their tax benefits, said Jillard. It involves reclassifying building components to accelerate depreciation deductions. This reclassification allows certain elements, such as HVAC systems and lighting, to be depreciated over shorter periods, reducing taxable income.

“Doing this can result in lower tax liabilities, improved cash flow, and enhanced return on investment,” he said. “Additionally, cost segregation can speed up the payback period for the property and potentially increase its resale or refinancing value.”

2026 will be a good time to take another look at the tax structure of your business.

Because the “pass-through” deduction for S corporations, partnerships, and similar entities was made permanent, more businesses can take write off as much as 20% of their profits before that income “passes through” to their individual returns, said Linda Scheer, a tax director at J. Cohen CPAs & Advisors in Philadelphia. This deduction would have sunset at the end of this year had it not been extended permanently, she added.

“We plan to review our small-business clients’ 2025 pass-through status,” Scheer said.

Petillo says that while pass-throughs are very popular with small-business owners, much of this income will be taxed at higher individual rates (the top tax rate is as high as 37%) while the corporate rate is still fixed at 21%.

“Maybe an S corporation or partnership is perfect for you and minimizes your ultimate tax liability,” he said. “But perhaps converting to a C corporation is more attractive to potential future investors.”

Thanks to the new tax bill, businesses can now fully deduct the cost of their research and development expenses in the year incurred, a benefit that had phased out in 2022. Small businesses (those with average annual gross receipts of $31 million or less) can retroactively apply full expensing to tax years 2022, 2023, and 2024 by filing amended tax returns. The deadline to do so is July 4, 2026.

This deduction is not to be confused with the research and development tax credit, which is a credit against either income or payroll taxes owed. Business owners may be able to amend this credit to also take advantage of expenses going back to 2022.

“These benefits are enormously advantageous to business owners of innovative and creative companies that engage in experimentation and are taking financial risk in improving their processes and procedures,” said Jillard.

Those looking to start new companies should consider it as a Qualified Small Business under Section 1202 of the tax code, Gerstein said.

Such an entity must be a U.S. C corporation with newly issued stock that is actively engaged in qualified trade or business like manufacturing, technology and software development, life sciences, engineering, industrial, distribution, or a research and development-heavy business. The new tax law made it even easier to form and invest in these types of companies, and the long-term benefits are substantial because the longer investors hold on to the stock, the more tax benefits can be realized.

“Changes to these rules offer new opportunities for investors and founders,” he said. “Noncorporate investors can now exclude 50% of gains on small business stock after three years, 75% after four, and 100% after five or more.”

And, he added, “Being a Qualified Small Business is a powerful tool for attracting investment, planning future exits, and encouraging long-term growth.”