Entity Choice, Deductions, and Credits: Key Tax Issues for Business Owners This Season

For business owners, current-season tax review usually centers on three areas: whether the entity structure still fits the business, whether deductions are being claimed and substantiated correctly, and whether available credits are being coordinated with filing and reporting requirements. The sources here address several current issues affecting pass-through owners and employers, including section 199A, payroll-related deductions, and employer credits (Grant Thornton).

Entity choice remains important because pass-through treatment affects both owner-level deductions and state tax planning. The section 199A qualified business income deduction remains available at 20%, and the limitation phase-in increases in 2026 to $75,000 for individuals and $150,000 for joint filers (Grant Thornton). For pass-through owners in high-tax states, state pass-through entity tax regimes may still matter even after the federal SALT cap increase, because those regimes can convert capped individual deductions into entity-level deductions, although some states may sunset or revise those regimes (Grant Thornton).

On deductions, business owners should review whether expenditures are currently deductible or must be capitalized. For rental real estate and similar businesses, the sources emphasize the distinction between repairs and improvements, the treatment of local benefit assessments, and the need to capitalize betterments, restorations, and adaptations while depreciating them over the applicable recovery period. Depreciation timing, placed-in-service dates, and basis allocation remain central to the deduction profile of real property businesses.

Employer credits and payroll-related compliance are also prominent. Beginning in 2026, employers face reporting obligations tied to the new deductions for qualified tips and qualified overtime compensation, although temporary penalty relief applied for 2025 payments (Grant Thornton). That means payroll systems, occupation coding, and wage reporting need to be reviewed now if the business expects employees to claim those deductions (Grant Thornton).

The paid family and medical leave credit was permanently extended and expanded, and beginning in 2026 employers may in some cases claim the credit based on insurance premiums paid for qualifying leave coverage, even if no employee uses the benefit during the year (Grant Thornton). The employer-provided childcare credit also becomes more favorable for taxable years beginning after December 31, 2025, with higher credit percentages and larger annual caps, including enhanced rules for eligible small businesses (Grant Thornton).

Business owners should also note deduction limitations. For expenses incurred after December 31, 2025, section 274(o) disallows deductions for certain employer-provided meals and on-premises eating facilities, subject to limited exceptions (Grant Thornton). That makes expense segregation and documentation more important where businesses operate cafeterias, break rooms, or meal programs.

The current-season takeaway is that business owners should revisit entity-level and owner-level consequences together: pass-through deduction eligibility, state PTE tax elections, capitalization versus current deduction treatment, payroll reporting for new employee deductions, and employer credits that may now be more valuable than in prior years (Grant Thornton).