Article Summary:
- Many of the 2026 tax updates apply to 2025 returns filed this year.
- Key changes include new deductions for tips and overtime, a higher SALT cap, expanded child and senior deductions, continued QBI benefits, full bonus depreciation, and increased flexibility for 529 plans.
- For California business owners, these updates create both opportunities and complexity, making coordinated tax, business, and estate planning more important than ever.
A lot of things changed in the last year as it relates to your taxes, and more changes are showing up as you prepare to file your 2025 tax return. Several changes came through the One Big Beautiful Bill Act (OBBBA) and related IRS guidance, including new deductions for qualified tips, qualified overtime, car loan interest, and a new senior deduction, as well as a higher SALT cap and updated standard deduction amounts.
For California business owners, these tax changes in 2026 create both opportunities and complexity, making coordinated tax and estate planning more important. This blog will explore the most relevant tax changes for business owners in 2026, focusing on what may affect your 2025 return and planning decisions.
How the 2026 Tax Updates Affect Your Return and Your Business
Before you focus on individual deductions, step back and clarify what you need to know right now. You are usually trying to answer one of two questions:
- Will this lower your tax bill on the return you’re filing now?
Some updates can reduce your federal taxable income or tax liability on your 2025 return filed in 2026, but many come with income limits, phaseouts, and narrow definitions. That means the headline benefit does not always translate into real savings for your household.
- Will this change what you should do inside your business before year-end?
In many cases, yes. Timing still matters, especially for equipment purchases, payroll and compensation decisions, entity structure considerations, and wealth-transfer or succession planning. These choices can change what you report, what you can deduct, and what the next few years look like.
If you own a business in California, keep these two rules in mind:
- Federal vs. California rules differ: California may not follow federal updates (including OBBBA items), so you often plan separately for federal and CA returns. This is one reason California tax law updates matter so much for business owners.
- Big federal deductions may not reduce CA tax: Depreciation can be faster federally than in California, leaving higher taxable income at the state level even when federal tax drops.
This is why the most useful approach is not simply listing changes. It’s running the numbers for your household and your business together, then deciding what to do next based on both federal and California outcomes.
The Most Relevant 2026 Tax Updates
Below are the most relevant tax updates for California business owners, with a focus on what may affect your 2025 return.
- New Deduction for Qualified Tip Income
There is now a federal deduction tied to tip income, subject to limits. The idea is simple: some tip income can reduce taxable income. There are guardrails. Income thresholds, phase-outs, and filing status matter.
If you or someone in your household earns tips, you may be eligible to deduct qualified tips on your federal return for tax years 2025–2028, subject to income-based phaseouts and other limits.
You still need clean records. The IRS has issued guidance and examples for how qualified tips are determined when forms do not break out tips the way you expect.
What it means for business owners
Tip income is still income. If it is properly reported, it may support retirement contributions (depending on your situation and eligibility rules) like your Roth IRA. For younger workers, even modest earnings, paired with family support, can yield long-term benefits.
- New Deduction for Qualified Overtime Premium Pay
If you earn overtime (or your spouse does), the new deduction generally applies to the premium portion of FLSA-required overtime pay (the “extra” above the regular rate), with caps and income phaseouts.
The IRS examples focus on how to compute the premium portion when payroll systems show only a total overtime number. This deduction has caps and higher limits for married couples filing jointly. It also highlights an important principle: tax strategies stack. One spouse may earn tips, another overtime, or one person may earn both. The combined picture matters more than any single rule.
What it means for business owners
If you have employees who earn overtime, pay practices and reporting accuracy matter more than they used to. The IRS has also discussed future reporting changes tied to qualified overtime and tips.
- The Standard Deduction Remains Higher (And Is Still Adjusting)
This is a quiet but meaningful change. The higher standard deduction is sticking around and continues to adjust for inflation.
Years ago, many households itemized deductions. When the standard deduction increased, millions stopped itemizing because it produced a better result with less paperwork. That remains true for many taxpayers, simplifying filing while reducing taxable income.
The IRS lists the higher standard deduction amounts for 2025 and 2026, along with the OBBBA adjustments.
What it means for business owners
Even if you are a business owner, your personal return may still be standard-deduction-driven, so don’t assume itemizing is automatic.
- Expanded Child Tax Credit
Families with children may benefit from a larger child tax credit, subject to income limits.
Unlike deductions, credits reduce tax liability dollar-for-dollar. For eligible households, this can materially lower the tax bill.
The Child Tax Credit was increased to $2,200 per child effective in 2025, with inflation adjustments after 2025 discussed in policy analysis. Credits reduce tax liability dollar-for-dollar, but phaseouts still apply.
What it means for business owners
If your income varies year to year, it may affect whether you get the full value of the credit.
- Higher SALT Cap for Itemizers
The SALT cap increase is one of the biggest changes for higher-tax states like California.
The benefit depends on whether you itemize and whether you are in the phaseout range.
Even if SALT becomes more valuable federally, you still need to reconcile differences on the California return using California’s rules and forms.
What it means for business owners
For Californians with higher income taxes or property taxes, this can be a turning point. Some households that previously relied on the standard deduction may find itemizing worthwhile again. This is one area where running the numbers matters.
- New Deduction for Seniors (Age 65+)
If you (or your spouse) are 65 or older, there is an additional $6,000 deduction per eligible person (up to $12,000 for a qualifying couple), available for both itemizers and standard deduction filers, with phaseouts. Eligibility depends on age and income thresholds by year-end.
What it means for business owners
This can create room for moves like Roth conversion planning, but it needs to be modeled
against the rest of your income.
- QBI Deduction Stays in Place (Section 199A)
If your business is a pass-through (LLC, S corp, partnership, sole prop), the Section 199A Qualified Business Income (QBI) deduction, worth up to 20% of certain business income, remains a major lever and was extended to provide planning stability.
The value of QBI is highly fact-specific (income type, wages, assets, SSTB status, taxable income thresholds).
What it means for business owners
Entity structure, reasonable comp (if applicable), and timing of income and deductions can change the outcome. Run projections, don’t guess. This deduction was expected to expire, so its continuation is a meaningful win. It isn’t flashy, but it often drives real tax savings for closely held businesses.
- Bonus Depreciation Returns to 100% Federally
At the federal level, OBBBA restored 100% bonus depreciation for qualifying property placed in service after the law’s effective date, reversing the scheduled phase-down.
Bonus depreciation is generally automatic unless you elect out, but the best choice depends on cash flow and future income expectations. Section 179 and bonus depreciation are different tools.
What it means for business owners
California has a long history of decoupling from federal bonus depreciation, so you can end up with a large federal deduction and a smaller California deduction. For equipment, vehicles, or certain improvements, the best choice depends on cash flow, future income, and long-term plans.
- Expanded Uses for 529 Plans
529 plans now have broader qualifying uses, including certain credentialing, licensing, and continuing education programs, broader K–12 expense categories, and a higher annual K–12 distribution limit starting in 2026 (as described in education savings coverage). Not every program qualifies. Some credentials must meet criteria tied to recognized lists and systems.
What it means for business owners
If you are funding education or career training for children or family members, review how these expanded rules change what you can pay tax-free.
- Higher Federal Estate Tax Exemption
The IRS inflation-adjustment release states that estates of decedents who die in 2026 have a $15,000,000 basic exclusion amount, up from 2025.
What it means for business owners
Your tax and succession plans should not be separate conversations.Even if you are well below federal estate tax levels today, business growth, real estate appreciation, and liquidity events can change the picture fast.
- Car Loan Interest Deduction
The OBBBA created a new federal deduction for interest paid on a loan used to purchase a qualified vehicle for personal use, with a $10,000 annual cap, income-based phaseouts, and documentation requirements, such as including the VIN on the return.
What it means for business owners
If you are close to the income phaseout, timing and total income for the year matter. This is not a blanket “all car loans qualify” rule. The vehicle and the loan have to meet eligibility criteria, and leases don’t qualify.
- Higher Mileage Rate for Business Driving
If you deduct mileage, the IRS announced the 2026 standard mileage rate for business use is 72.5 cents per mile, effective January 1, 2026.
This is not a blanket “all car loans qualify” rule. The vehicle and the loan have to meet eligibility criteria, and leases don’t qualify.
What it means for business owners
You still need contemporaneous mileage records. If you have a reimbursed mileage policy in your business, confirm it aligns with your documentation and tax position. For business owners and others who deduct business mileage, this change directly affects deductions.
- A New IRS Schedule for These Temporary Deductions
To handle several temporary deductions created by the OBBBA, the IRS created Schedule 1-A (Form 1040), “Additional Deductions,” for the 2025 tax year (the return you file in 2026).
What it means for business owners
More forms mean more chances for errors. Make sure the documents you keep match what the IRS expects (pay stubs, tip logs, loan interest statements, proof of eligibility). If your household has multiple “new deduction” items, coordinating them on one return is the real work.
Start a Coordinated Tax Plan for Your Business and Family
With so many moving parts, tax planning is no longer just filing. You are coordinating income, deductions, payroll decisions, equipment purchases, and long-term estate and succession goals, while also dealing with California’s separate conformity rules.
At Dahl Law Group, our team works with California business owners to integrate tax planning with business succession and estate planning, so short-term changes support long-term goals rather than create surprises. This supports smarter tax planning for business owners who want clarity before decisions are locked in.
Helping business owners through the formation, growth, and succession stages of their business.
Frequently Asked Questions
- Do these changes apply to my 2026 income?
Many of the headline items show up first on your 2025 federal return filed in 2026, while some inflation adjustments apply to the 2026 tax year (returns filed in 2027). If you’re asking how taxes will change in 2026, the short answer is that some changes affect what you file now, while others affect what you earn in 2026.
- Will everyone benefit from the new deductions?
No. Several deductions have caps and phaseouts based on modified adjusted gross income, plus strict eligibility rules.
- Does the higher SALT cap matter if I don’t itemize?
It can. The SALT change makes itemizing worth re-checking for more California households, but you only benefit if itemized deductions exceed your standard deduction.
- Is bonus depreciation always the best choice?
Not always. Federal 100% bonus depreciation can be valuable, but it should be weighed against cash flow, future income, and state differences, especially California’s decoupling rules.
- Should business owners revisit their tax strategy this year?
Yes. The combination of new deductions, updated IRS forms, SALT changes, and federal-state mismatches makes a proactive review much safer than waiting until the year closes to react.
Dahl Law Group
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