2026 Business Tax Deduction Changes: New IRS Rules

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, is the biggest change to small business tax rules since the 2017 Tax Cuts and Jobs Act. Some of its provisions took effect immediately in 2025, and several more kick in for the 2026 tax year, which most owners will file in early 2027. The IRS has since issued the numbers and guidance that make these rules concrete.

Here is a plain-English rundown of the changes most likely to affect your deductions, with the verified figures and effective dates. This is general information, not tax advice.

In this article

100% bonus depreciation is permanent
Section 179: higher permanent limits
Domestic R&D is fully deductible again
The QBI deduction is now permanent
Business meals: deductions that disappear in 2026
The 2026 mileage rate
New 1099 reporting thresholds
What to do before you file

100% bonus depreciation is back, and it is permanent

Bonus depreciation lets you deduct the full cost of qualifying equipment in the year you place it in service instead of writing it off over several years. Under the old phase-down schedule, the rate had been dropping toward zero.

OBBBA reversed that. The IRS confirmed in Notice 2026-11 that the 100% first-year deduction is permanent for qualified property acquired and placed in service after January 19, 2025. There is no scheduled phase-out this time. Qualifying property generally includes machinery, equipment, computers, vehicles, and other tangible business assets with a recovery period of 20 years or less.

If you bought equipment in 2025 or plan to in 2026, you can generally deduct 100% of the cost in that year, as long as it was placed in service (not just ordered) after the January 19, 2025 date.

Section 179 expensing: higher permanent limits

Section 179 is the other way to expense assets up front. For 2026, under IRS Rev. Proc. 2025-32, you can expense up to $2,560,000 of qualifying purchases. The deduction begins to phase out dollar for dollar once your total qualifying purchases for the year exceed $4,090,000. Certain heavy SUVs (6,000 to 14,000 pounds gross vehicle weight) remain capped at a $32,000 first-year Section 179 deduction.

OBBBA made these higher limits permanent and indexed to inflation, so they will rise each year rather than reset. In practice, most small businesses can now fully expense a normal year of equipment purchases using Section 179, bonus depreciation, or a combination of the two.

Domestic R&D is fully deductible again

This is the change many product and software businesses have been waiting for. The 2017 law forced companies to capitalize research and experimental costs and deduct them slowly over five years, which created painful tax bills for firms that spend heavily on development.

OBBBA created new Section 174A, which lets you fully deduct domestic research and experimental costs in the year you pay or incur them, for tax years beginning after December 31, 2024. Costs for research conducted outside the United States must still be capitalized and amortized over 15 years.

There is also relief for prior years. Eligible small businesses (generally those with average annual gross receipts of $31 million or less) can elect to apply the immediate expensing retroactively to 2022 through 2024. To claim it, you generally need to amend those returns or file for an administrative adjustment on or before July 6, 2026. If you capitalized R&D on recent returns, this is worth reviewing with your accountant soon, because that deadline is firm.

The QBI deduction is now permanent

The Qualified Business Income (QBI) deduction under Section 199A lets owners of pass-through businesses (sole proprietors, partnerships, and S corporations) deduct up to 20% of their qualified business income. It had been scheduled to expire after 2025.

OBBBA made the 20% deduction permanent. Note that earlier drafts of the bill proposed raising the rate to 23%, but that increase did not make it into the final law. The rate stays at 20%.

Two changes do make the deduction a bit more generous starting in 2026:

Wider phase-in ranges for the income limitations, expanding the range from $100,000 to $150,000 for joint filers and from $50,000 to $75,000 for other filers. That lets more owners above the income thresholds keep a larger share of the deduction.
A new minimum deduction of $400 for any taxpayer with at least $1,000 of QBI from an active trade or business. Both figures will be inflation-adjusted after 2026.

Business meals: some deductions disappear in 2026

This one costs money if you miss it. Effective January 1, 2026, two categories of meal expenses that used to be 50% deductible become fully nondeductible:

Meals provided to employees for the convenience of the employer on your business premises.
Meals served through an employer-operated eating facility or on-site cafeteria.

The everyday deductions most owners rely on are unchanged:

Client business meals remain 50% deductible when the business owner or an employee is present.
Meals while traveling away from home overnight for business remain 50% deductible.
Company-wide social events, such as a holiday party or a summer picnic primarily for rank-and-file employees, remain 100% deductible.
Meals you sell to customers as part of your business remain fully deductible.

Entertainment expenses stay nondeductible, as they have been since 2018. A few narrow exceptions to the new employer-meal rules survive, including meals sold to employees at full value and meals on certain vessels and offshore rigs.

The 2026 standard mileage rate is 72.5 cents

If you deduct vehicle costs using the standard mileage method, the IRS set the 2026 business rate at 72.5 cents per mile, up 2.5 cents from 2025, effective January 1, 2026. The medical and moving rate is 20.5 cents per mile, and the charitable rate stays at 14 cents. The business rate applies to gas, diesel, hybrid, and fully electric vehicles alike.

New 1099 reporting thresholds

Two reporting thresholds changed, and both reduce paperwork.

Form 1099-K: The threshold reverts to more than $20,000 in payments AND more than 200 transactions for third-party settlement organizations like PayPal, Venmo, Square, Etsy, and eBay. Both conditions must be met. This reverses the $600 threshold from the American Rescue Plan and is retroactive to 2022.
Form 1099-NEC and 1099-MISC: The threshold for reporting payments to contractors and vendors rises from $600 to $2,000, effective for payments made after December 31, 2025. The threshold will be indexed for inflation going forward.

A caution on the 1099-NEC change: a higher reporting threshold does not change what is taxable. Income you earn is still income whether or not a 1099 is issued, and you still need to keep clean records of what you pay contractors even below $2,000.

A few more changes worth knowing

SALT deduction cap: The cap on deducting state and local taxes rose to $40,000 for taxpayers with adjusted gross income under $500,000, with the cap increasing 1% a year from 2026 through 2029. This shows up on the owner's personal return and interacts with pass-through entity tax elections in many states.
Tips and overtime: OBBBA created temporary federal deductions for certain qualified tips and qualified overtime pay for tax years 2025 through 2028. If you run payroll in a tipped or hourly business, expect new reporting details.
Employer-provided childcare credit: The maximum credit increased from $150,000 to $500,000 (up to $600,000 for eligible small businesses) starting in 2026.

What to do before you file

Match your fixed-asset records to the new rules. Confirm the placed-in-service dates for 2025 and 2026 equipment so you claim bonus depreciation or Section 179 correctly.
Flag capitalized R&D on recent returns. If you are a small business that capitalized domestic research costs in 2022 through 2024, talk to your accountant about the retroactive election before the July 6, 2026 deadline.
Reclassify your meal expenses now. Split your bookkeeping into buckets: 50% client and travel meals, 100% company events, and nondeductible employer-convenience and cafeteria meals. Doing it in real time beats reconstructing it next spring.
Update your mileage tracking to 72.5 cents for 2026 business miles.
Adjust your 1099 workflow. Reset your vendor reporting threshold to $2,000 for 2026 payments, but keep tracking all contractor payments regardless.
Revisit your entity and QBI position. With the 20% deduction now permanent and the phase-in ranges wider, it is a good year to confirm your structure still fits.

The theme across all of these changes is the same: the deductions are more generous, but they reward clean, categorized books. The owners who benefit most are the ones whose transactions are labeled correctly throughout the year, not scrambled together at filing time. Tools like BooksGPT can categorize your income and expenses automatically as they come in, so the buckets above are already sorted when your accountant needs them.

This article is general information, not tax advice. Rules and figures can change, and your situation is specific to you. Consult a qualified tax professional before acting.

What changed for business tax deductions in 2026: the new IRS rules to know.