Small Business Taxes Q & A
By: Tax Hotline
Fall 2026 (Vol. 44, No. 3)
Q: As a small business owner, I like to offer fringe benefits as incentives for my employees. What are the tax rules I need to know?
A: Identifying taxable benefits before the final payroll runs of 2026 can help prevent reporting errors, payroll tax problems and unexpected Form W-2 adjustments.
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.
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 fi ling 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.
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.
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.
Q: Could bad debts lower my 2026 taxes?
A: Yes. When customers or others don't pay what they owe your business, you may be able to claim a bad debt deduction to help offset the financial loss. But it isn't automatic. Businesses must satisfy specific federal tax rules and maintain adequate records to support the deduction.
Not Every Unpaid Debt Is Eligible. Whether an unpaid debt is deductible depends on several factors. First, the debt generally must be connected to your trade or business. Examples include unpaid customer invoices, certain loans to customers or suppliers and some business-related guarantees.
The debt also must be bona fi de. This means there must have been a genuine expectation of repayment when the money was advanced or credit was extended. Documentation such as invoices, contracts, promissory notes and payment terms can show the transaction was a legitimate debt rather than a gift or capital contribution.
Additionally, not every business is eligible to deduct unpaid customer receivables. The purpose of the deduction is to offset a previous tax liability. So, you must have previously included the receivable in your income.
If your business uses the cash-basis method of accounting, you generally recognize income only when payment is received. Because unpaid invoices generally haven't been included in taxable income, they're typically not deductible as bad debts.
Accrual-basis businesses generally recognize income when it's earned rather than when payment is received. As a result, they may be eligible for a bad debt deduction if an amount previously included in income later becomes partially or totally worthless. For partially worthless business debts, a charge-off for accounting purposes generally is required.
How Mixed-Purpose Debts Are Treated. Some debts may involve both business and personal motives. For example, suppose you guarantee a loan for one of your best customers, who also happens to be a close friend. If the borrower defaults, whether the loss is treated as a business or nonbusiness bad debt depends on whether your dominant motivation in making the guarantee was to help your business or your friend.
The distinction is important because nonbusiness bad debts are deductible only if they're totally worthless. And they're treated as short-term capital losses, which can generally offset capital gains and up to $3,000 of ordinary income annually, with any excess carried forward.
Document Your Collection Efforts. One of the most important requirements is showing that you've made reasonable efforts to collect the debt. Simply deciding that a customer probably won't pay usually isn't enough to conclude the debt is worthless. It's also critical to keep records of the actions you've taken. These may include invoices, reminder notices, collection letters, payment plans, correspondence with attorneys or collection agencies and information showing the debtor's financial difficulties, bankruptcy or insolvency. Going to court isn't necessary if you can demonstrate that obtaining a judgment would be futile.
If you haven't consistently documented your collection efforts, there's still time. Review overdue accounts and make sure your files reflect the steps you've taken to pursue payment. This can make a significant difference if the IRS questions your deduction.
Q: How can I use accessibility credits to lower my tax bill?
A: Improving accessibility at your business may come with a valuable tax break. Eligible small businesses can claim the Disabled Access Credit for certain costs related to improving accessibility for individuals with disabilities. A business may qualify if, in the prior tax year, it had gross receipts of $1 million or less or no more than 30 full-time employees.
The credit equals 50% of eligible expenses above $250 but not over $10,250. Examples of potentially eligible costs include providing interpreters for people with hearing impairments, providing readers for people with visual impairments, and acquiring or modifying equipment or devices. Contact the office if you need guidance on the credit.
Q: Can I deduct Long Term Care (LTC) premiums?
A: That depends. Qualified LTC policies are considered health insurance under federal income tax rules. So if you buy a policy, your premiums are treated as medical expenses for itemized deduction purposes.
But your total eligible medical expenses for the year must meet the 7.5% of adjusted gross income threshold before you can start deducting LTC premiums. And there are age limits on how much you can deduct. For example, You can deduct $500 for individuals age 40 and under and $6,200 for those 70 and over. Other age groups' 2026 maximums fall between these two.