As we approach the end of 2026 and begin planning for 2027, now is an ideal time to evaluate your tax position and identify opportunities to minimize taxes and maximize cash flow. Several business tax provisions are now permanent, while other significant changes are taking effect for the first time. Taking a proactive approach before year-end can create valuable planning opportunities and help avoid surprises when we prepare your tax return. If you haven't yet scheduled a year-end tax planning discussion with us and would like to, please call the office at 410-643-4477 and ask for Marie.
Here are some key annual considerations and notable tax law changes that may impact your business.
State tax issues continue to evolve as businesses expand into new markets, increase online sales, and utilize remote employees. Even businesses with no physical location in another state may have filing requirements or tax obligations based on their sales activity or workforce. Reviewing your state tax footprint periodically can help avoid unexpected assessments, penalties, and compliance issues.
Maryland and several other states have implemented a Pass-through Entity Tax. This allows eligible businesses, such as partnerships and S corporations, to pay state income tax at the entity level. Doing so can reduce the federal taxable income that passes through to owners' personal returns, offering a workaround to the federal cap on state and local tax deductions. In Maryland, the PTE tax is deductible for federal purposes in the year the entity makes the payment, not when the tax is assessed or incurred. The One Big Beautiful Bill Act left this workaround in place, and it remains most valuable for higher-income owners whose own SALT deduction is phased down.
For 2026, Maryland’s PTE tax still applies only to Maryland-source income. A 2025 law that would have taxed a resident owner’s income from all sources was postponed to 2027. For 2026 only, the Comptroller honors the election made with the second-quarter estimate, not the first.
Separately, Maryland now imposes a 2% tax on net capital gain for individuals with federal adjusted gross income over $350,000. It applies at the owner level, so PTE payments do not cover it. If you are selling a business or a major asset, plan your estimated payments for it.
Action Steps:
If your business sells products or services online or across state lines, you need to understand and comply with sales tax requirements. Please note that we do not monitor your sales volume or transaction counts by state, nor do we register or file sales tax returns as part of your income tax preparation. We can recommend software solutions or connect you with a sales tax service provider. You must act on this matter independently to ensure compliance.
New in Maryland: since July 1, 2025, Maryland charges a 3% sales and use tax on data and information technology services and software publishing services, including sales from one business to another. Sales between affiliated companies are not exempt, and each renewal or payment after that date on an older contract counts as a new sale. If you sell or buy IT, data, cloud, or software services, review your invoices and vendor bills now.
Maryland Tax Connect
The State of Maryland has transitioned to Maryland Tax Connect, a new online portal that lets businesses and individuals manage multiple tax accounts and business-related transactions in one place. The portal can be accessed at https://mdtaxconnect.gov.
See our article about this here: https://kmaf.cpa/news/2026-guide-to-making-maryland-individual-tax-payment
Through Maryland Tax Connect, businesses can:
Action Steps:
Many businesses continue to invest in equipment, technology, vehicles, software, and facility improvements. Fortunately, current tax law still provides generous deductions for many of these purchases. Strategic planning can help determine whether accelerating deductions into 2026 or preserving them for future years will produce the best long-term tax result.
Fixed assets (such as computers, machinery, vehicles, furniture, and buildings) can be handled differently for tax purposes. This gives you flexibility in how and when you deduct their cost. Depending on your strategy, you can choose to expense these items more quickly to reduce your current tax bill or spread the deductions over time to manage future tax liabilities.
First-year bonus depreciation remains one of the most powerful tax-saving tools available to businesses. The One Big Beautiful Bill Act (OBBBA) permanently restored 100% bonus depreciation for qualified property acquired after January 19, 2025 (an asset counts as acquired on the date you signed a binding contract to buy it). Businesses may continue to fully expense qualifying machinery, equipment, computers, and certain other business assets in the year they are placed into service.
Section 179 remains one of the most valuable tax planning tools available to business owners. For tax years beginning in 2026, businesses may elect to immediately expense up to $2.56 million of qualifying property placed in service during the year. The deduction begins to phase out once qualifying purchases exceed $4.09 million. These inflation-adjusted limits provide significant opportunities for businesses investing in equipment, machinery, vehicles, software, and certain improvements to nonresidential real property.
Action Steps:
This election allows businesses to immediately deduct the cost of certain low-cost purchases, such as furniture, equipment, tools, and office supplies, rather than depreciating them over several years. This election simplifies recordkeeping and reduces administrative burden.
Generally, qualifying items costing $2,500 or less per item or invoice may be deducted immediately.
Health premiums paid by the business are deductible but must be included as Federal and State taxable wages on the shareholder's Form W-2. Although reported as taxable wages, the shareholder can generally claim an above-the-line self-employed health insurance deduction on their personal return.
To qualify:
Partnerships may deduct premiums paid on behalf of partners or LLC members. These payments are generally reported as guaranteed payments on Schedule K-1. The partners or members then report the income on their personal returns and may qualify for an above-the-line deduction, subject to applicable limitations.
To qualify:
Sole proprietors and Single-Member LLCs filing Schedule C or Schedule F may qualify for the self-employed health insurance deduction.
To qualify:
Retirement plans remain one of the most effective ways for business owners to reduce current taxes while building long-term wealth. Beyond creating retirement savings opportunities for employees, many plans can generate significant deductions for business owners while helping businesses attract and retain talented employees.
There are many plan options available, including SEP IRAs, SIMPLE IRAs, 401(k)s, Roth 401(k)s, and other qualified retirement plans.
Some benefits include:
A company profit-sharing plan can be an effective year-end tax-planning strategy for business owners looking to reduce taxable income while building retirement savings for themselves and their employees. Business contributions are generally tax-deductible and can often be funded after year-end, providing flexibility while still generating a deduction for the current tax year.
Unlike many retirement plans, annual contributions are discretionary, allowing employers to vary contribution amounts based on profitability and cash flow. Profit-sharing plans can be particularly attractive for closely held businesses because they may allow substantial deductible contributions for owners while also helping attract and retain employees.
If you are considering establishing a new profit-sharing plan or making additional contributions to an existing plan, we encourage you to contact us before year-end so we can help determine the contribution levels, deadlines, and potential tax benefits available to your business.
Action Steps:
The Maryland Saves Program (marylandsaves.com) continues to require many Maryland employers that do not sponsor a qualified retirement plan to facilitate employee participation in the state-sponsored retirement savings program. Employers should periodically review their obligations to ensure continued compliance with program requirements.
Employee benefit programs can improve employee retention while also providing valuable tax advantages to both employers and employees. Year-end is an excellent time to evaluate whether available benefits are being fully utilized.
Employers may provide up to $5,250 per employee annually toward qualified student loan repayment (this shares the same $5,250 annual limit as tuition and other educational assistance), and the benefit remains excluded from the employee's federal taxable income. The One Big Beautiful Bill Act made this benefit permanent.
For 2026, employers may provide up to $7,500 of tax-free dependent care assistance ($3,750 if married filing separately).
This benefit may be used for:
Starting with 2026 Forms W-2, employers must separately report qualified overtime (box 12, code TT, the FLSA-required premium only) and cash tips (box 12, code TP, with the employee’s tipped occupation code in box 14b). Your employees need these amounts to claim their new deductions. Confirm with your payroll provider now that overtime premiums and tips are being tracked separately for the full year.
Businesses may generally deduct 50% of qualifying business meal expenses when the expense is ordinary, necessary, and directly related to business activities. This may include meals with clients, customers, prospects, or employees where a legitimate business purpose exists. To support the deduction, businesses should keep adequate documentation, including receipts, attendees (when applicable), and the meal's business purpose. Proper recordkeeping remains essential if the IRS ever reviews the expense.
The Good: Certain employee-focused events continue to receive favorable tax treatment and generally remain 100% deductible, including:
The Bad: However, beginning in 2026, meals furnished at the employer's business location for the employer's convenience are generally not deductible (0%). This includes many meals previously treated as de minimis fringe benefits, such as employer-provided coffee, snacks, beverages, and meals furnished during the regular workday.
The Ugly: Entertainment expenses generally remain non-deductible for tax purposes. Examples include sporting events, golf outings, concerts, theater events, and similar entertainment activities involving clients or customers.
For payments made during 2026, the federal information reporting threshold increased from $600 to $2,000 for many Form 1099 filing requirements. The IRS continues to increase enforcement efforts to ensure compliance with Form 1099 reporting. If your business pays rent, service providers, subcontractors, attorneys, or independent contractors, you may be required to issue one or more Forms 1099.
Obtaining a completed Form W-9 before payments are made can help avoid year-end reporting issues and ensure compliance with IRS information reporting requirements. You can download Form W-9 here: https://www.irs.gov/pub/irs-pdf/fw9.pdf
Action Steps:
The QBID, claimed on an individual's Form 1040, is permanent and remains one of the most valuable tax benefits for owners of pass-through businesses. Eligible owners of sole proprietorships, partnerships, and S corporations may qualify for a deduction of up to 20% of qualified business income on their personal income tax returns. Passive income, such as interest, dividends, and rental income that does not rise to the level of a trade or business, generally does not qualify.
The deduction may be limited or phased out for higher-income taxpayers. Owners of certain service-based businesses, including accounting, consulting, legal, financial, and healthcare practices, should pay particular attention to these income thresholds when projecting year-end taxable income, as their deduction may be reduced or eliminated once income exceeds specified levels.
Year-end bonuses can be an effective tax planning tool for businesses expecting higher taxable income in 2026. Businesses can generally deduct bonuses paid to employees, including shareholder-employees, which can help reduce taxable income while rewarding employee performance. In addition, bonuses may be used to increase tax withholding, maximize retirement plan contributions, or satisfy reasonable compensation considerations for S corporation shareholders. Business owners should review year-end compensation plans to determine whether additional wages or bonuses make sense based on projected profitability, cash flow, and overall tax objectives.
Action Steps:
As IRS enforcement efforts continue to focus on closely held businesses, S corporation and C corporation owners should periodically review compensation arrangements. Paying too little salary can attract IRS scrutiny and may lead to additional payroll tax assessments, while paying excessive compensation may create unnecessary payroll taxes or reduce tax efficiency.
Compensation should reflect the services actually performed and be consistent with industry standards, the owner's qualifications, time devoted to the business, and the company's profitability.
Many businesses overlook valuable tax credits because they may be industry-specific or tied to particular business activities. We encourage business owners making significant investments, hiring employees, developing new products, improving processes, or expanding operations to discuss potential credit opportunities before year-end.
Examples include:
Several energy incentives are ending. The energy-efficient commercial buildings deduction (§ 179D) is not available for buildings whose construction begins after June 30, 2026, and the new energy-efficient home credit (§ 45L) ends for homes acquired after that date. The commercial clean vehicle credit already ended for vehicles acquired after September 30, 2025.
Businesses engaged in software development, engineering, manufacturing, product design, process improvement, automation, or other innovative activities should evaluate whether they qualify for federal and state research-related incentives. Recent legislation restored more favorable treatment for many taxpayers by permitting the immediate deduction of qualifying domestic research expenditures in situations where amortization rules previously applied. In addition, qualifying businesses may be eligible for valuable federal R&D tax credits that can directly reduce tax liability.
The Paid Family and Medical Leave Credit is permanent and expanded to include certain insurance premium arrangements. The legislation also provides additional guidance regarding aggregation rules and coordination with state and local paid leave programs.
Tax planning is most effective when completed before year-end, while you still have opportunities to influence your tax outcome. Waiting until tax return season often limits the planning strategies available. To summarize some of the points above, before year-end, consider discussing the following planning opportunities with our office:
We encourage you to contact us before year-end to discuss any of these planning strategies. Taking action before December 31 often creates opportunities that are no longer available once the year has ended.
Thank you for the opportunity to serve as your trusted advisor. We appreciate your business and look forward to helping you achieve your tax and financial goals in 2027.
Best regards,
Kram, McCarthy, Ayers & Frost, LLC
Main Office: (410) 643-4477
Christopher Williams, CPA/PFS, CFP®, MST, chrisw@kmaf.cpa
Gregory Litvinuck, CPA, gregl@kmaf.cpa
Art G. Svrjcek, CPA, arts@kmaf.cpa
Diana Villaruz, CPA, dianav@kmaf.cpa
Sources: Comptroller of Maryland, Tax Alert TA-13-APR-2026PTE (Apr. 13, 2026); GRF CPAs (May 20, 2026); IRS Notice 2020-75; Comptroller of Maryland, Technical Bulletin No. 56 (June 30, 2025); MarylandComptroller.gov (Maryland Tax Connect); IRS Notice 2026-11; Rev. Proc. 2025-32; IRS FS-2025-05 (Aug. 21, 2025); Instructions for Forms 1099-MISC and 1099-NEC (Rev. 12/2026); 2026 General Instructions for Forms W-2 and W-3 and FS-2026-13, as summarized by Experian (Feb. 3, 2026) and the Ohio Society of CPAs (Aug. 20, 2026); MarylandSaves.com; KPMG 2026 Personal Tax Planning Guide; The Tax Adviser (Mar., Apr., and July 2026); Journal of Accountancy (Jan. 2026); The Kiplinger Letter (Aug. 14, 2025; Dec. 30, 2025; Aug. 13, 2026).
This article is provided for general informational purposes only and does not constitute tax, legal, or accounting advice. It should not be relied upon as a substitute for consultation with a qualified professional regarding your specific circumstances and was prepared by KMAF with the assistance of AI-powered editing tools.
