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Get Ahead of Taxable Benefits

As year end approaches, businesses have plenty of tax and payroll tasks competing for attention. One easy-to-overlook area is employee and owner benefits. Identifying taxable benefits before the final payroll runs of 2026 can help prevent reporting errors, payroll tax problems and unexpected Form W-2 adjustments.

Take Stock of Fringe Benefits

Many fringe benefits are excluded from employees’ taxable income, yet employers generally may still deduct their cost as a business expense. Benefits that don’t qualify for an exclusion usually must be included in employees’ taxable compensation.

Common examples of benefits that may be excluded from taxable wages include employer-provided health insurance, dependent care assistance, group-term life insurance, educational assistance and certain transportation benefits (but the employer can’t deduct them), subject to various limits.

Taxable fringe benefits may include personal use of a company vehicle, many entertainment and sporting event tickets, gift cards and other cash-equivalent benefits. Generally, the taxable amount is the benefit’s fair market value, less any amount paid by the employee or excludable by law. Special valuation rules may apply.

Know What’s New

Major legislation enacted in July of 2025 made several changes affecting benefits, including dependent care and educational assistance.

For 2026, the maximum exclusion for employer-provided dependent care assistance increased to $7,500 ($3,750 for married taxpayers filing separately).

The 2025 law also made qualifying student loan payments permanently eligible for the educational assistance exclusion and added inflation adjustments after 2026. For 2026, employers generally can provide up to $5,250 in tax-free educational assistance, including qualifying student loan payments.

Don’t Overlook Special Owner Rules

Fringe-benefit rules can differ for business owners, depending on the entity type and benefit involved. For instance, one particularly important year-end payroll issue applies to S corporation shareholder-employees who own more than 2% of the company. Health and accident insurance premiums paid or reimbursed by the S corporation generally must be included in the shareholder-employee’s Form W-2 wages for federal income tax purposes.

Provided certain requirements are met, the premiums generally aren’t subject to Social Security, Medicare or federal unemployment taxes. Proper reporting can also affect the shareholder’s ability to claim the self-employed health insurance deduction.

Act Before Year End

Don’t wait until Forms W-2 are prepared. Failing to account for taxable benefits properly can lead to insufficient federal income and payroll tax withholding, underpaid employer payroll taxes, penalties and incorrect wage reporting. Contact the office for help reviewing employee and owner benefits and determining the proper tax treatment before year end.

Could You Owe the NIIT?

Selling a highly appreciated investment late in the year could trigger an additional tax cost: the 3.8% net investment income tax (NIIT). If you’re considering a significant transaction before January 1, first estimate the potential tax impact and evaluate planning opportunities.

How the NIIT Works

You may be subject to the NIIT if you invest outside of tax-deferred accounts and your modified adjusted gross income (MAGI) exceeds the applicable threshold: $200,000 for single filers and heads of household, $250,000 for married couples filing jointly or $125,000 for married taxpayers filing separately. These thresholds aren’t indexed for inflation, so more taxpayers are subject to the NIIT now than when the tax first went into effect.

The NIIT equals 3.8% of the lesser of your net investment income or the amount by which your MAGI exceeds the applicable threshold.

Net investment income generally includes taxable interest, dividends, capital gains, rents, royalties, nonqualified annuities and income from passive business activities. Wages, Social Security benefits, tax-exempt interest and income from nonpassive business activities (other than certain financial trading businesses) generally aren’t included.

Distributions from IRAs and qualified retirement plans also aren’t net investment income. But taxable distributions can increase MAGI and, therefore, increase the amount of investment income exposed to the tax.

Watch for a Year-End Spike

A one-time transaction, such as selling appreciated stock or investment real estate, can push MAGI above the NIIT threshold. Before closing a large sale in 2026, consider whether changing the timing or structure could reduce your NIIT exposure.

For example, you can postpone the stock sale until 2027 or structure the real estate transaction as an installment sale to spread the gain over multiple tax years. If you’re at NIIT risk and you’ve already realized gains in 2026, harvesting capital losses before year end may offset those gains and reduce both MAGI and net investment income. (Keep the wash-sale rules in mind when selling securities at a loss.)

Investors should also account for dividends, mutual fund capital gain distributions and other investment income expected before year end. These amounts can increase both MAGI and net investment income, potentially increasing your NIIT exposure.

Reducing MAGI can also help. Depending on your circumstances and eligibility, maximizing pretax contributions to an employer retirement plan, making deductible traditional IRA contributions or contributing to a Health Savings Account may lower MAGI.

If you have flexibility over the timing of other taxable income, deferring it until 2027 may also help reduce your 2026 MAGI. Remember that itemized deductions don’t reduce MAGI and, therefore, won’t reduce NIIT exposure.

Project and Plan

NIIT planning shouldn’t drive an investment decision. Current market conditions, cash flow needs and your broader financial goals are important. But if a large transaction is on the horizon, modeling the tax consequences before acting is a good idea. Contact the office for help projecting your 2026 MAGI and NIIT exposure so you can plan accordingly.

Tax-Smart Building Improvements

If your business is planning improvements to a building before year end, careful planning may allow you to maximize your 2026 tax deduction. A special safe harbor can allow qualifying small businesses to deduct such expenditures currently — but only if expenses don’t exceed the applicable limit.

Could You Qualify?

Normally, a business that has performed repairs or maintenance on a building can expense those costs and take an immediate deduction. But costs incurred to improve a building must be depreciated over several years. The safe harbor for small businesses allows costs that might be considered improvements to be currently deducted up to certain limits.

The safe harbor is generally available to businesses with average annual gross receipts of $10 million or less for the three preceding tax years. It applies to an eligible building that the business owns or leases and that has an unadjusted basis of $1 million or less.

For the safe harbor to apply, the total amount paid during the tax year for repairs, maintenance, improvements and similar activities on the building must not exceed the lesser of:

• $10,000, or
• 2% of the building’s unadjusted basis.

For example, for an eligible building with a $400,000 unadjusted basis, the safe harbor limit is $8,000. If your total qualifying expenditures stay within that amount, you may be able to deduct them currently rather than capitalize them.

Watch the Annual Limit

The annual limit makes tracking building expenditures important. If total costs exceed the applicable threshold, the safe harbor doesn’t apply to any of the expenditures for that building.

Before authorizing additional work, review how much you’ve already spent. If you’re close to the limit, another project before year end could push you over the threshold. It may make sense to postpone nonessential work until the following year.

Expenditures that don’t qualify for the safe harbor may still be currently deductible, but you must evaluate them under the general tangible property regulations. Under those rules, costs that result in a betterment, restoration or adaptation to a new or different use generally must be capitalized.

Seek Guidance

If repairs or improvements are on your year-end agenda, contact the office before moving ahead. It’s important to review your building’s unadjusted basis and your year-to-date expenditures to help determine whether the safe harbor could benefit your business.

Charitable Givers Get a New Tax Break

Beginning in 2026, taxpayers who take the standard deduction may deduct up to $1,000 of qualifying charitable contributions, or up to $2,000 for married couples filing jointly. Only cash contributions qualify, such as gifts made by check, debit or credit card, payment app or payroll deduction. Contributions of property, such as clothing, household items or securities, don’t qualify.

If you expect to claim the standard deduction, you may want to make qualifying charitable gifts before December 31. Doing so could reduce your taxable income while supporting causes that are important to you. Keep records supporting any deduction claimed. Contact the office with any questions.

New Law Expands Disaster Tax Relief

The Doug LaMalfa Federal Disaster Tax Relief Certainty Act was signed into law in September. It extends expanded personal deductions for disaster-related losses temporarily available under the Federal Disaster Tax Relief Act. Without the relief, victims of a federally declared disaster can deduct personal casualty losses only if they itemize deductions and only to the extent those losses exceeded 10% of their adjusted gross income (AGI).

The now-extended relief allows eligible disaster victims — generally for disasters starting December 28, 2019, through December 31, 2026 — to deduct qualified losses above $500 without itemizing and removes the 10% of AGI threshold for those losses. The law also extends the exclusion of qualified wildfire relief payments from taxable gross income. Contact the office for details.

Maximize Tax-Free Gifts of Ownership Interests in Your Business

Business owners may be able to transfer wealth more tax efficiently by gifting ownership interests to family members. For 2026, the gift tax annual exclusion is $19,000 per recipient.

Certain interests may qualify for valuation discounts. For example, a minority interest may qualify for a lack-of-control discount because the holder can’t dictate business decisions. A lack-of-marketability discount may apply when there’s no ready market for selling the interest. Assuming a combined discount of 25%, this year you could gift an interest worth up to $25,333 (on a controlling basis) tax-free because the discounted value wouldn’t exceed the $19,000 annual exclusion. Contact the office to learn more.

Upcoming Tax Due Dates

October 15

Individuals: File a 2025 income tax return (Form 1040 or Form 1040-SR) if an automatic six-month extension was filed (or if an automatic four-month extension was filed by a taxpayer living outside the United States and Puerto Rico). Pay any tax, interest and penalties due.

Individuals: Make contributions for 2025 to certain existing retirement plans or establish and contribute to a SEP for 2025 if an automatic six-month extension was filed.

Individuals: File a 2025 gift tax return (Form 709) and pay any tax, interest and penalties due if an automatic six-month extension was filed.

Calendar-year bankruptcy estates: File a 2025 income tax return (Form 1041) if an automatic six-month extension was filed. Pay any tax, interest and penalties due.

Calendar-year C corporations: File a 2025 income tax return (Form 1120) if an automatic six-month extension was filed. Pay any tax, interest and penalties due.

Calendar-year C corporations: Make contributions for 2025 to certain employer-sponsored retirement plans if an automatic six-month extension was filed.

Employers: Deposit Social Security, Medicare and withheld income taxes for September if the monthly deposit rule applies.

Employers: Deposit nonpayroll withheld income tax for September if the monthly deposit rule applies.

November 2

Employers: Report Social Security and Medicare taxes and income tax withholding for third quarter 2026 (Form 941) and pay any tax due if all of the associated taxes due weren’t deposited on time and in full.

November 10

Individuals: Report October tip income of $20 or more to employers (Form 4070).

Employers: Report Social Security and Medicare taxes and income tax withholding for third quarter 2026 (Form 941) if all of the associated taxes due were deposited on time and in full.

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