Year-end tax planning checklist: Q4 strategies to lower your 2026 tax bill
Lower your 2026 tax bill with smart Q4 moves on income timing, equipment, retirement savings, and estimated tax.
Written by Kari Brummond—Content Writer, Accountant, IRS Enrolled Agent. Read Kari's full bio
Written by Kari Brummond—Content Writer, Accountant, IRS Enrolled Agent. Read Kari's full bio
Published Tuesday 20 October 2026
Table of contents
Key takeaways
- Plan strategically in Q4 to reduce your 2026 tax bill through careful timing of income and expenses before the December 31 deadline
- Buy equipment by year-end to claim the Section 179 deduction (up to $2,560,000 for 2026) or 100% bonus depreciation in 2026 rather than waiting until 2027
- Maximize contributions to a simplified employee pension (SEP) individual retirement account (IRA), Solo 401(k), or other qualified plan to reduce taxable income while building retirement savings
- Time your Q4 estimated tax payment to meet safe harbor rules (90% of this year's tax, or 100% or 110% of last year's) and avoid penalties
Why year-end tax planning matters for small businesses
You have to pay taxes, but the right strategy can help minimize your tax liability. Getting ready to file means gathering paperwork and reviewing tax deductions. It's also a chance to check tax law updates and review this year's finances, so you can choose Q4 tax strategies that help you save.
So where should you start? The right advisor makes a big difference. An experienced certified public accountant (CPA) or tax preparer can help you plan. In the meantime, here are some ideas to get started.
To learn more, check out these IRS tax tips.
Timing strategies: accelerating deductions and deferring income
If you use cash accounting, consider timing deductions and income to optimize this year's or next year's tax situation. If your income is high this year, you may lower it by deferring income to next year and accelerating some deductions.
If income is relatively low this year and you expect more next year, do the reverse. Get the income on the books for 2026 and delay paying any expenses possible until 2027.
Deferring income can be as simple as sending an invoice a bit later than usual or stalling collections for accounts receivable. Accelerating deductions is just a fancy way of saying “prepay expenses,” but you need to be aware of the rules.
The IRS only lets you deduct prepaid “rights or benefits” you'll use by the end of the tax year or within 12 months. For instance, if you prepay a 36-month insurance policy at year-end, you can only deduct the current year's portion. If you pay for a 12-month policy, you can deduct the full payment because it qualifies under the 12-month rule.
What can you prepay? Consider launching a new advertising campaign or making purchases you've been putting off.
Major equipment purchases before December 31
During year-end tax planning, small businesses should consider investing in new equipment, especially if you want to offset high earnings for the current tax year. The equipment must be placed in service (purchased, delivered, and ready to use) during the tax year, which for a calendar-year business means by December 31. Place your order early enough to allow for delivery and setup.
Then you've got a few options. You can depreciate the expense over time, deducting part of the asset's cost this year and the rest in future years. If you want the maximum deduction right now, you've got two major options: Section 179 or bonus depreciation.
Section 179 lets you write off the full cost of most capital assets in the year of purchase, with dollar limits on some vehicles. Under IRS Revenue Procedure 2025-32, the 2026 limit is $2,560,000, reduced dollar for dollar once Section 179 property placed in service passes $4,090,000. For example, if you put $4,590,000 of Section 179 equipment into service, your maximum deduction drops by $500,000 to $2,060,000. Once you pass $6,650,000 in Section 179 purchases, you no longer qualify for this deduction.
If you'd rather not depreciate a business vehicle, you may be able to deduct the IRS standard mileage rate instead. The rate is 72.5 cents per mile for January 1–June 30, 2026. Under IRS Announcement 2026-11, it rises to 76 cents per mile from July 1, 2026.
The One Big Beautiful Bill Act made 100% bonus depreciation permanent for qualifying property acquired after January 19, 2025. Under IRS Publication 946, your Section 179 deduction can't exceed your business's taxable income.
Most new or used business equipment qualifies for Section 179 or bonus depreciation. Section 179 generally doesn't cover buildings themselves, though the Form 4562 instructions let certain improvements to nonresidential property, such as roofs and heating, ventilation, and air-conditioning (HVAC) systems, qualify.
Maximizing retirement contributions
Contributing to a tax-deferred retirement account reduces your taxable income, and small business owners have plenty of options. For 2026, you can contribute up to $7,500 to an individual retirement account (IRA), or $8,600 if you're age 50 or older. If you or your spouse has a retirement plan through an employer, you need to meet income limits to deduct your full contribution.
There are also special retirement plans for small businesses, including savings incentive match plan for employees (SIMPLE) IRAs and SEPs. These have much higher limits and are relatively easy to administer. But the rules are complicated: you may need to offer these plans to all your employees, or standardize them across multiple businesses. Before opening one of these plans, talk with a specialist.
The great thing about most retirement contributions is that you get extra time. Generally, you have until April 15 of the following year to make contributions that count for the previous year. With some retirement accounts, you have until the extended filing deadline: September 15 for partnerships and S corporations, or October 15 for sole proprietors.
Reviewing estimated tax payments
Did you make all your estimated tax payments this year? If not, it's time to catch up so you don't face an unexpected tax bill in the spring. If you've overpaid, you may want to reduce your last quarter's payment.
If you overpay, you can get the excess back as a refund or apply it to next year's estimated tax. Still, try to avoid paying in too much, as that's effectively lending the government your money for free.
To avoid penalties, you must pay at least 90% of this year's tax liability or 100% of last year's bill. Under the Form 1040-ES rules, if your prior-year adjusted gross income topped $150,000 ($75,000 married filing separately), that rises to 110%.
Use the form's worksheet to estimate this year's tax, including self-employment tax, based on your business income and expenses. Factor in the expenses and deductions that are part of your Q4 tax strategies, then adjust your fourth-quarter payment as needed.
Here's the IRS's small business, self-employed tax calendar so you can review due dates.
Year-end tax planning checklist
Let's bring it all together with a year-end tax planning checklist:
- Estimate your tax liability by looking through your accounting records and projecting revenue and expenses for the year. Your potential tax bill shows how much planning you need to do.
- Optimize your deductions to lower your tax bill. Consider prepaying expenses where allowed or investing in new equipment.
- Schedule retirement contributions to reduce your taxable income and plan for the future. Ask a specialist whether a small business retirement plan could help you save even more.
- Maximize contributions to a health savings account (HSA) or flexible spending account (FSA) if you qualify. You can make HSA contributions up to next year's filing deadline.
- Harvest investment losses if you or your business owns stocks. Selling the losers can offset other investment gains or some of your other income.
That covers the basics. Depending on your time and how many changes you're willing to make, your accountant can help you find more ideas.
Plan your tax strategy with Xero
Filing tax returns and year-end tax prep rely on one thing: the right numbers. Xero can help you get there. Use Xero for your small business accounting and make tax season and Q4 planning easier than ever.
Ready to try? Choose a plan today and get one month free.
FAQs on year-end tax planning
Year-end tax planning is complicated, but a few hours of strategizing now can lower what you owe when you file. Here are answers to some of your most pressing questions.
When should I start year-end tax planning?
Schedule year-end tax planning for Q4, well before the last week of December. Ideally, start looking over your records and building a strategy in October or November so you have time to act.
Can I deduct purchases made in early January for 2026 taxes?
No, cash-basis businesses deduct expenses in the year they pay them, so only purchases made in the current tax year qualify for write-offs. If you make a purchase in January 2027, you claim it on your 2027 tax return, even if you bought it on January 1.
Should I buy equipment even if I don't need it just for the tax deduction?
No, even in a high tax bracket, it doesn't make sense to spend money on things you don't need. Make sure each year-end purchase meets a real business need, and treat the tax saving as a bonus.
What if I can't afford to prepay expenses or make large purchases?
You can claim write-offs on purchases made with a loan or credit card, and deduct the interest as a business expense. Check that the interest doesn't outweigh the tax savings, because in some cases it's best to wait.
Do I need to pay my Q4 estimated taxes before December 31?
No, according to IRS Publication 505, your Q4 estimated tax payment for 2026 isn't due until January 15, 2027. Focus on Q4 tax strategies now, though, because by January most of your options, except retirement account contributions, are gone.
Can I still make retirement contributions after December 31 for 2026?
Yes, under IRS Publication 590-A, you generally have until April 15, 2027, to make qualifying contributions for 2026. If you request a filing extension, you can even set up a SEP plan and fund it by your extended deadline.
Disclaimer
Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.