The tax decisions that reduce what an S-corp and its shareholders owe are not made in March. They are made in October, November, and December, when there is still time to change the outcome. By the time the Form 1120-S is being prepared, the year is over and the options are gone. The return reflects what happened. What happens before December 31 is where the strategy lives.
The owners who consistently pay less are the ones who had a different kind of conversation in Q4. This post covers the specific moves worth making before the year closes, updated for 2026 and the changes that came with the One Big Beautiful Bill Act signed in July 2025.
The most valuable thing an S-corp owner can do in October is project where the year is going to land. That means taking actual income and expense figures through the third quarter, adding a reasonable estimate for Q4, and working backward from the projected taxable income to understand what decisions are still available.
That projection should specifically examine:
This analysis takes time and is the reason Q4 planning conversations matter. The moves available in October are not available in January, and by March they are history.
Tip: If you have not had a mid-year check-in with your CPA, schedule one before November. The difference between a Q4 conversation and an April conversation is the difference between options and a number on a return you cannot change.
For S-corp owners, the interaction between salary, distributions, and the QBI deduction makes year-end salary analysis more important in 2026 than it has ever been. The One Big Beautiful Bill Act made the Section 199A deduction permanent, which removes the expiration uncertainty that previously complicated this planning. The deduction allows eligible S-corp owners to deduct up to 20 percent of qualified business income from their K-1 income. The W-2 salary is not qualified business income. Only the distribution portion is.
That creates a pull in both directions. A higher salary reduces QBI and therefore reduces the deduction. A lower salary reduces payroll taxes but invites IRS scrutiny on reasonable compensation. The right number is not the lowest defensible salary or the highest comfortable one. It is the number supported by market data for the specific role, documented in writing, and modeled against the full tax picture including the QBI impact.
For shareholders above the phase-out threshold (approximately $191,950 for single filers and $383,900 for joint filers in 2026) the QBI deduction begins to phase out and may be eliminated entirely for specified service trades or businesses. Healthcare, law, accounting, consulting, and financial services are SSTBs. For those owners, the salary-versus-distribution balance is less about the QBI interaction and more about finding the defensible minimum salary that satisfies the IRS standard.
Tip: Review the reasonable compensation determination every Q4, not once at formation and never again. A salary that reflected market rates three years ago may not reflect them today if the business has grown or the owner's role has changed. The IRS compares the salary to what the market would pay for the current role at the current revenue level, not the one that existed when the salary was first set.
The One Big Beautiful Bill Act restored 100 percent bonus depreciation permanently for qualifying property placed in service after January 19, 2025. Section 179 expensing was also expanded, with the limit increased to $2.56 million for 2026 and the phase-out threshold starting at $4.09 million. For an S-corp that purchased or is considering purchasing equipment, vehicles, or other qualifying property, both of these provisions require a deliberate decision before December 31.
The mechanics for S-corps work differently from sole proprietors. Bonus depreciation and Section 179 deductions pass through to shareholders on their K-1, subject to each shareholder's individual basis and at-risk limitations. A shareholder with zero basis in the S-corp stock cannot use the deduction currently even if the corporation claims it at the entity level. Section 179 is also limited by the corporation's taxable income and cannot create a loss at the entity level.
The strategy of using Section 179 first and then applying bonus depreciation to any remaining cost is worth modeling with specific numbers for your situation before year-end, not after an asset purchase that was made without understanding the tax mechanics.
Tip: If the S-corp is planning a significant asset purchase in Q1 of next year, run the comparison between placing it in service before December 31 versus after January 1. In many cases the full first-year deduction makes the current-year timing significantly more valuable, and that decision must be made before the year closes.
Retirement plan contributions are one of the cleanest ways for S-corp owner-employees to reduce taxable income, and the deadlines matter more than most people realize.
For owner-employees with a Solo 401(k), contributions come in two parts. The employee salary deferral, up to $23,500 for 2026 with a $7,500 catch-up for those 50 and older, must be elected by December 31. The employer profit-sharing contribution, up to 25 percent of W-2 compensation, can be made up to the Form 1120-S filing deadline including extensions. But the plan itself must be established before December 31 to accept contributions for the current year. An owner-employee who does not yet have a Solo 401(k) and wants to begin contributing for 2026 has until December 31 to establish the plan.
For S-corps with multiple employees, the retirement plan options expand significantly, but so do the nondiscrimination rules that govern how contributions must be allocated among participants. A plan design that heavily favors owner-employees without meeting the applicable nondiscrimination tests is a plan that will face IRS correction requirements. The year-end planning conversation with a CPA should confirm that any new or existing plan is structured to deliver the intended benefit without creating a compliance problem.
Tip: Solo 401(k) contribution limits are substantially higher than SEP-IRA limits for most S-corp owner-employees because the Solo 401(k) combines a salary deferral with an employer match. For an owner-employee paying themselves a $90,000 salary in 2026, the maximum Solo 401(k) contribution is $46,000 ($23,500 in salary deferral plus $22,500 in employer match at 25 percent of compensation) compared to $22,500 maximum under a SEP-IRA. Modeling both options before year-end takes about fifteen minutes and can make a meaningful difference in the current year deduction.
Before year-end, confirm that any distributions taken from the S-corp during the year did not exceed the accumulated adjustments account balance. Distributions within the AAA are tax-free to shareholders because the underlying income was already reported and taxed. Distributions that exceed the AAA are treated as a return of capital up to the shareholder's stock basis, and capital gain above that.
An S-corp that took large distributions during a year with lower-than-expected income may have inadvertently distributed more than the AAA could support. Discovering that after the year closes is expensive. Catching it before December 31 allows the corporation to plan the remaining distributions and the shareholder to understand the tax character of what they have received.
Tip: Ask your CPA to project the year-end AAA balance before any additional distributions are made in Q4. Knowing where the account stands before December 31 is the only way to make an informed decision about the tax character of distributions taken in the final quarter.
The SALT deduction cap increased to $40,000 under the One Big Beautiful Bill Act for 2026. But for S-corps with shareholders in high-tax states, the pass-through entity tax election allows the corporation to pay state income tax at the entity level, deduct that payment as a business expense, and pass a corresponding credit to each shareholder on their state return. That structure converts what would otherwise be a partially or fully nondeductible individual SALT payment into a fully deductible corporate expense.
Texas does not impose a personal income tax, so the PTET election is less directly relevant for S-corps operating exclusively in Texas with Texas-resident shareholders. For S-corps with shareholders in California, New York, Illinois, or other high-tax states, the analysis is worth running before the state-specific election deadline closes.
Tip: PTET election deadlines vary by state and do not always align with the federal filing calendar. Some states require the election to be made before the end of the tax year. If any shareholders live or the corporation operates in a state with a personal income tax, confirm the PTET election deadline with your CPA before December 31.
Every move described in this post has a hard deadline at December 31 or within the final weeks of the year. Equipment must be placed in service. The Solo 401(k) plan must be established. The salary review must be completed before the final payroll of the year. The AAA analysis must precede the final distribution. The PTET election must be evaluated against state-specific deadlines.
None of this is available in March. March is when the Form 1120-S is prepared. December is when it is shaped.
At TrueView CPA, S-corp tax preparation and S-corporation tax filing services for business owners across Dallas and Texas include year-round planning conversations, not just a filing engagement in the spring. If you are an S-corp owner and you have not had a Q4 planning conversation yet this year, the time to start is now.
Want to maximize your year-end tax savings? Schedule a call with our tax experts today.
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