Three 2026 Tax Changes That Could Reshape Small Business Deals

If you own, buy, sell, or invest in a small or lower middle market business, 2026 is not a year to leave tax planning to the fourth quarter. A series of federal tax changes tied to the Working Families Tax Cuts law, signed on July 4, 2025, are already influencing how business owners think about capital spending, debt, EBITDA, and transaction structure. The Internal Revenue Service has spent the first half of 2026 releasing guidance on several of the most consequential provisions, including permanent 100 percent bonus depreciation, updated business interest limitation rules, and new relief for domestic research and experimental expenses. (irs.gov)

For business owners, the headline is simple. Tax law changes do not just affect your return, they affect valuation, diligence, purchase price negotiations, earnout expectations, and post-closing integration. In the lower middle market, where a deal may depend on one lender, one landlord, one key customer, and a thin margin for error, that matters a great deal. (irs.gov)

Here are three changes worth paying attention to right now, and how they may shape transactions through the rest of 2026.

1. Permanent 100 percent bonus depreciation changes the math on expansion and acquisitions

In January 2026, Treasury and the IRS issued guidance confirming that eligible depreciable property acquired after January 19, 2025 can qualify for permanent 100 percent additional first year depreciation. That is a major development for acquisitive companies, real estate adjacent businesses, manufacturers, hospitality groups, and operators with meaningful equipment, furniture, fixtures, and technology spend. (irs.gov)

For a buyer, this can improve the after-tax economics of a deal, especially where a transaction includes significant tangible personal property, leasehold improvements, or other depreciable assets. For a seller, it can make an asset sale more attractive to a buyer than a stock sale, which may affect negotiations over structure and price. And for operators that are not in the market to sell, it can support a more aggressive capex plan because the tax benefit arrives much faster. (irs.gov)

This is particularly relevant in hospitality and multi-unit service businesses. Restaurant groups, hotel operators, franchisees, and event businesses often face recurring expenditures for buildouts, kitchen equipment, POS systems, signage, and FF and E. When those costs can be expensed more quickly, the business case for opening the next location, renovating the underperforming one, or rolling up a competitor becomes easier to underwrite. (irs.gov)

The legal takeaway is that tax efficiency should be part of the LOI conversation, not an afterthought. If a deal team waits until definitive documents are being marked up, it is often too late to optimize allocations, purchase price mechanics, or closing timing. Counsel should be coordinating early with tax advisors on asset classification, elections, and any covenants that could affect who gets the benefit of accelerated deductions. (irs.gov)

2. Business interest rules are shifting, and debt-heavy deals need a fresh look

The IRS updated its guidance on the business interest expense limitation under Section 163(j) in late 2025, with changes that affect years beginning after December 31, 2024 and additional changes that kick in for years beginning after December 31, 2025. Among other items, the IRS notes that for tax years beginning after December 31, 2025, Section 163(j) is applied before most mandatory or elective interest capitalization provisions, with limited exceptions, and disallowed business interest generally carries forward. The updated FAQs also explain that adjusted taxable income once again includes addbacks for depreciation, amortization, and depletion for years beginning after December 31, 2024. (irs.gov)

Why does that matter for deals? Because many lower middle market transactions are still financed with a meaningful amount of debt. If your acquisition model assumes a certain level of deductibility for interest expense, your cash flow forecast may not match reality. Conversely, if depreciation and amortization addbacks increase ATI, some borrowers may find a bit more room in the model than they had under prior assumptions. (irs.gov)

This is not just an accounting issue. It can affect lender negotiations, leverage tolerance, covenant compliance, and the buyer’s willingness to agree to fixed purchase price or earnout terms. A borrower that expects interest deductions to be fully available may overestimate post-closing liquidity. A seller that assumes the buyer can comfortably service acquisition debt may be overestimating the bidder pool. (irs.gov)

Real estate and real estate intensive businesses should pay particular attention. IRS guidance continues to distinguish between excepted and non-excepted trades or businesses for Section 163(j) purposes, and businesses operating across multiple entities may need careful allocation work. Owners with a holding company, operating company, and property affiliate structure should resist the temptation to treat all debt and all income streams as economically interchangeable for tax purposes. (irs.gov)

The practical move here is simple, run the model again. If you are planning a leveraged acquisition, refinancing, recapitalization, or expansion, revisit your assumptions with counsel, your CPA, and your lender before you sign. The deal you thought penciled in six months ago may pencil very differently today.

3. Domestic research deductions are back in play, but small businesses faced a July 6, 2026 deadline for retroactive relief

One of the quieter but more important 2026 developments involves domestic research and experimental expenses. The Taxpayer Advocate Service highlighted on June 8, 2026 that some small businesses could apply the new domestic R and E rules retroactively to tax years beginning after December 31, 2021 and before January 1, 2025, but that for many taxpayers the deadline to make that retroactive election was July 6, 2026, subject to the normal refund claim deadline. The IRS has also issued procedural guidance on who qualifies and how elections and accounting method changes may be made. (taxpayeradvocate.irs.gov)

Under the IRS guidance, a qualifying small business taxpayer generally must meet the gross receipts test under Section 448(c), and for a taxable year beginning in 2025, the inflation-adjusted threshold is $31 million. The revenue procedure also explains that eligible small businesses may elect to deduct domestic research or experimental expenditures currently, or capitalize and amortize them under the new framework, and it describes methods for recovering remaining unamortized amounts from prior years. (irs.gov)

This matters far beyond tech startups. Plenty of closely held businesses incur costs that may qualify as domestic research or experimental expenditures, including product development companies, food and beverage brands, manufacturers, software enabled service businesses, and some operational businesses investing heavily in process improvement. In M and A, the issue is even more important because historic treatment of these expenses can affect quality of earnings, normalized EBITDA, deferred tax assumptions, working capital positions, and whether a buyer sees a target as well run or sloppy. (taxpayeradvocate.irs.gov)

If you are selling a business, expect buyers to ask whether your company had domestic research expenses in the 2022 through 2024 period, how they were treated, and whether any elections, amended returns, or method changes were made. If you are buying, this belongs on the tax diligence checklist. Retroactive relief may create opportunity, but it can also create cleanup work. (taxpayeradvocate.irs.gov)

The broader lesson, tax law is now a transaction issue

What ties these developments together is not just tax. It is deal execution. Permanent bonus depreciation may make an asset-heavy acquisition more compelling. Updated interest limitation rules may reshape how much leverage a buyer can prudently use. New R and E relief may alter how a target’s historical financials should be read. Each of these issues affects risk allocation in transaction documents, from reps and warranties to indemnity baskets to post-closing cooperation covenants. (irs.gov)

This is where sophisticated legal planning adds value. The right legal team helps business owners connect tax developments to the documents they are actually signing, including LOIs, purchase agreements, loan documents, leases, employment arrangements, and operating agreements. A tax rule that looks technical in an IRS release can become very practical once it changes the way a bank underwrites a loan or a buyer values a customer contract. (irs.gov)

Action items for owners and operators in the second half of 2026

If you are a business owner, investor, or real estate operator, here are five practical steps to consider now:

Review expansion plans and capex timing. If your business expects meaningful equipment or improvement costs, confirm whether accelerated depreciation changes the economics of moving sooner rather than later. (irs.gov)

Re-run debt models. If you are financing growth, an acquisition, or a recap, revisit Section 163(j) assumptions with your advisors before terms are locked in. (irs.gov)

Audit prior treatment of domestic research expenses. If your company incurred product, software, or process development costs, confirm whether you were eligible for relief and whether any action was required before July 6, 2026 or another applicable deadline. (taxpayeradvocate.irs.gov)

Upgrade tax diligence in active deals. Buyers should ask better questions, and sellers should be prepared with cleaner answers and supporting workpapers. (irs.gov)

Bring legal counsel in earlier. Waiting until draft agreements are circulating is often too late to protect optionality on structure, timing, and risk allocation. This is especially true in founder-led businesses and closely negotiated lower middle market deals. This final point is an inference drawn from how these IRS rules affect transaction structure and diligence. (irs.gov)

Final thought

2026 is shaping up to be a year when legal planning, tax planning, and business strategy need to be far more integrated than many owners are used to. For companies that are growing, borrowing, buying, or preparing for a sale, these changes are not background noise. They can directly influence value, timing, and leverage in a transaction. The businesses that move fastest are not always the ones that win, the businesses that prepare best usually do.

If your company is evaluating an acquisition, financing growth, cleaning up diligence issues, or preparing for a future exit, Warren Kalyan can help you think through the legal structure, negotiation strategy, and risk allocation before the pressure of a live deal takes over.

For assistance, contact us at hello@warrenkalyan.com or (512) 347-8777. Visit our website warrenkalyan.com or find us on social media @warrenkalyan.