2026 Corporate and Partnership Tax Changes: What to Decide Before December 31

Most of the attention on the 2025 tax law went to tips, overtime and the bigger SALT cap. The changes that land on corporate and partnership returns got far less of it, and several of them only start to bite in 2026. A few of them depend on a decision, an election or a record that has to exist before December 31. You can’t rebuild those in March.

This list comes from a business tax update course I attended this week. Every item below has been checked against the statute or the IRS release it comes from. After reading it, you should be able to:

• identify which 2026 changes apply to a C corporation, partnership or LLC you own;
• calculate whether your corporation’s charitable giving clears the new 1% floor;
• document the facts the new rules turn on: when stock was issued, when construction began and what each member actually does.

Level: intermediate for business owners, basic for practitioners.

Starting in 2026, a C corporation can deduct charitable contributions only to the extent they exceed 1% of taxable income. The 10% ceiling still applies above that (IRC §170(b)(2)). The amount under the floor carries forward only in a year when the corporation also gives more than the 10% ceiling. For most closely held corporations, that amount is simply lost.

Worked example. A corporation with $600,000 of taxable income has a $6,000 floor. If it gives $5,000 in 2026 and another $5,000 in 2027, it deducts nothing in either year. If it gives $10,000 in 2026 and nothing in 2027, $4,000 is deductible. The total given is the same and the result is better. For any corporation whose giving sits near 1% of income, bunching gifts into alternate years is now the default plan.

The floor applies to C corporations only. S corporations and partnerships pass gifts through to the owners’ personal returns, where a separate 0.5%-of-AGI floor applies to taxpayers who itemize.

Section 1202 lets an owner exclude gain on the sale of qualified small business stock: original-issue stock in a C corporation running an active business. For stock issued after July 4, 2025, the law added partial exclusions for shorter holding periods and raised both caps (IRC §1202):

Three cautions apply. S corporation stock never qualifies. The statute excludes many service fields, including health, law, accounting and consulting, and it also excludes restaurants and farming. And the exclusion is only as good as the records behind it: the issuance agreement, a balance sheet from the day the stock was issued and evidence each year that the business stayed active. Those documents are easy to create on the day of issuance and very hard to recreate during a sale.

For tax years beginning in 2026, Section 179 expensing is capped at $2,560,000. The cap starts phasing out once qualifying purchases pass $4,090,000 (Rev. Proc. 2025-32). 100% bonus depreciation is now permanent for property acquired after January 19, 2025 (IRS summary). For most small and mid-size businesses, the law no longer limits the write-off. The real questions are whether the asset is actually placed in service by December 31 and whether a full write-off makes sense against this year’s income. Our newsletter on Section 179 versus bonus depreciation covers that trade-off.

The bigger news is for buildings. New Section 168(n) allows an elective 100% deduction for qualified production property. That is the part of a nonresidential building used as an integral part of manufacturing, production, refining or agriculture. Under IRS Notice 2026-16, construction must begin after January 19, 2025 and before January 1, 2029. The building must be placed in service after July 4, 2025 and before January 1, 2031. The election is made by attaching a statement to the return for the year the building goes into service.

Office, sales and parking space don’t qualify. A building owned by one entity and leased to the operating company generally doesn’t qualify either, unless the two are related under the notice’s rules. If the building stops being used for production within 10 years, the deduction is recaptured as ordinary income. For manufacturers and farms planning a building, the date construction started now has a dollar value, and that date needs proof.

Two smaller items. From 2025, the business interest limit is computed on an EBITDA basis again, which frees up deductions for leveraged companies. Entities with average gross receipts of $32 million or less are exempt from the limit entirely (IRC §163(j)). Domestic research costs are deductible again; our earlier post on the restored R&E deductions covers the details.

A limited partner’s share of partnership income is exempt from self-employment tax, except for guaranteed payments for services (IRC §1402(a)(13)). Who counts as a limited partner has been argued in court for three years, and 2026 produced two appeals-court answers:

• The Tax Court in Soroban (2023) applied a functional test. A partner who works in the business is not “limited,” whatever the partnership agreement says.
• The Fifth Circuit withdrew its January opinion. On August 12, 2026 it held that a limited partner is one who “plays no significant role in managing or running a business” (K Alain, L.L.L.P. v. Commissioner).
• The Second Circuit decided Soroban on appeal on September 17, 2026. It requires both limited liability and no role in running, managing or controlling the partnership. The First Circuit still has Denham under review.

Wisconsin is in the Seventh Circuit, which has not ruled. These cases involved state-law limited partnerships, and the IRS has long treated active LLC members as owing SE tax on their full share. If you own an LLC and take the position that part of your income escapes SE tax, your operating agreement and your actual role in the business have to agree. Both also have to hold up under any of the three tests. SE tax applies to your K-1 share whether or not it was distributed, which is one reason a K-1 can show income you never received. Where the facts don’t support the position, the more defensible comparison is usually an S corporation election with a reasonable salary.

The 20% qualified business income deduction is now permanent. Starting in 2026, the phase-in range widens to $75,000 ($150,000 joint). Owners with at least $1,000 of QBI from businesses they materially participate in get a minimum $400 deduction (IRC §199A).

In IR-2026-83 the IRS replaced first-time abatement with an Automatic Exemption from Penalty. It covers taxpayers who filed and paid on time for the prior three years, or for 12 consecutive quarters on quarterly returns such as payroll. For them, failure-to-file, failure-to-pay and failure-to-deposit penalties are waived during processing, and no request is needed. It applies to original returns starting with tax year 2025 and to 2026 quarterly returns. It fully replaces first-time abatement for returns due on or after January 1, 2027. Information returns are excluded, and interest is still owed.

The downside is less obvious. One late payroll deposit in 2026 can cost the business automatic relief for the next three years. That makes a deposit calendar worth real money, especially if someone other than the person making the deposits checks it every quarter. If a penalty notice has already arrived, responding to it is a separate process.

This is the part to act on. Work down the table for each entity you own.

Because most of these are decided during the year, not on the return. A charitable gift made in January counts in 2027. Equipment that is delivered but not in service on December 31 is a 2027 asset. The date construction started and a member’s role in the business are facts. Facts are proven by records made at the time, not by explanations written months later. The return reports the decision; it doesn’t get to make it.

Timing for Southeastern Wisconsin: if your 2025 return was postponed under the November 2 disaster relief, it is due next week. Once it is filed, use the same week to set the 2026 year-end plan.