Tax Law Changes for 2026: What Bay Area Businesses Need to Know

The landscape of business taxation shifted dramatically with the passage of the One Big Beautiful Bill Act (OBBBA) on July 4, 2025. As the largest tax legislation since the Tax Cuts and Jobs Act of 2017, this new law introduces sweeping changes that will impact nearly every California business when filing 2026 taxes.

For Bay Area businesses—from Fremont tech startups to established Silicon Valley firms—understanding these changes is critical for strategic planning and compliance. Many provisions take effect January 1, 2026, but some changes are retroactive and could impact your 2025 tax returns filed in 2026.

Executive Summary: Key Changes at a Glance

Before diving into details, here's what you need to know:

Business Tax Changes:

• 1099 reporting threshold increased from $600 to $2,000
• Modified business meal deduction rules
• Changes to Section 199A pass-through deduction
• Permanent repeal of moving expense deductions (with military exceptions)

Individual Tax Changes:

• SALT deduction cap raised to $40,000 (from $10,000)
• Increased standard deduction for 2025
• Enhanced child tax credit made permanent
• New limitations on certain itemized deductions

Energy and Estate Tax:

• Termination of certain green energy credits
• Estate tax exemption increased to $15 million (permanent)

Let's explore what each of these means for your business.

Federal Tax Law Updates Affecting Businesses

1099 Reporting Threshold: Major Simplification

Old rule: Report payments of $600+ to independent contractors New rule: Report payments of $2,000+ starting in 2026

What this means for you:

If you're a Bay Area business that regularly works with freelancers, consultants, or contractors, you'll issue far fewer 1099-NEC and 1099-MISC forms. This reduces administrative burden significantly.

Example: A Fremont software company that pays 20 contractors between $600-$1,999 each year would have needed to issue 20 forms under the old rule. Under the new rule, zero forms are required for these contractors.

Action item: Review your 2026 contractor payments mid-year to identify who'll exceed the $2,000 threshold. Ensure you're collecting W-9 forms from those contractors.

California note: California may have different reporting requirements. Verify state-level thresholds with the Franchise Tax Board.

Business Meal Deductions: On-Premises Exemptions

The TCJA restricted deductions for various on-premises employer-provided meals. The One Big Beautiful Bill creates exemptions for certain businesses.

Who benefits:

• Tech companies with employee cafeterias
• Businesses providing meals for employee convenience
• Companies in industries where on-premises meals are customary

Previous rule: Many on-premises meal expenses were non-deductible New rule: Exemptions restore deductibility for qualifying businesses

Bay Area relevance: Silicon Valley tech companies often provide meals as a recruitment and retention tool. This change can restore significant deductions for qualifying companies.

Requirements for deductibility:

• Meals must be provided on business premises
• Must be for the employer's convenience
• More than 50% of employees must be offered the benefit

Action item: Document your meal program's business purpose and track expenses separately to claim this deduction. Consult with a tax professional to ensure your program qualifies.

Section 199A Pass-Through Deduction Modifications

The qualified business income (QBI) deduction allows pass-through entities (S-corps, partnerships, sole proprietorships) to deduct up to 20% of qualified business income.

What changed:

The One Big Beautiful Bill modifies the rules around this deduction, though specific details vary based on your industry and income level.

Who's affected:

• S corporation shareholders
• Partnership partners
• Sole proprietors with significant income

Income phase-outs: The deduction phases out at higher income levels, and the new law adjusted these thresholds and phase-out calculations.

Specified Service Trade or Business (SSTB) considerations: If you're in a service business (consulting, law, accounting, health, etc.), different rules apply. Bay Area professional services firms should pay special attention.

Example: A Newark consulting firm structured as an S corporation with $300,000 in qualified business income could potentially deduct $60,000 (20%), subject to limitations. The new rules may increase or decrease this benefit depending on total income and W-2 wages paid.

Action item: Model different scenarios with your tax advisor. The optimal entity structure might have changed under the new law.

Moving Expense Deduction: Permanent Repeal

The TCJA suspended the moving expense deduction through 2025. The One Big Beautiful Bill makes this repeal permanent (except for active-duty military).

What this means:

Employees relocating for work can no longer exclude employer-provided moving expense reimbursements from income or deduct unreimbursed moving costs.

Bay Area impact: Tech companies recruiting talent nationally often helped with relocation costs. These reimbursements are now taxable income to the employee.

Employer considerations:

• Gross-up relocation packages to cover the tax burden
• Offer sign-on bonuses instead of designated relocation reimbursements
• Consider this in total compensation negotiations

Military exception: Active-duty military members pursuant to military orders can still exclude moving expense reimbursements and deduct unreimbursed costs.

Action item: Review your relocation policies and update offer letters to reflect the tax treatment of moving expense reimbursements.

Individual Tax Changes Affecting Business Owners

SALT Deduction Increase: Significant Relief for High-Tax States

Previous cap: $10,000 for state and local tax (SALT) deductions New cap: $40,000 for joint filers ($20,000 for married filing separately) Effective: Through tax year 2029 Indexed for inflation: Yes

Why this matters in California:

California has high state income taxes (up to 13.3%) and property taxes. The previous $10,000 cap severely limited deductions for many California business owners.

Example: A San Jose business owner with:

• California income tax: $35,000
• Property tax: $18,000
• Total SALT: $53,000

Under old rules: Deduct $10,000 Under new rules: Deduct $40,000 Additional deduction: $30,000 Tax savings at 37% rate: $11,100

Strategic considerations:

Even with the increased cap, high earners in California may still hit the new $40,000 limit. Consider:

• Timing large income events to spread over multiple years
• Maximizing deductions in other categories
• Evaluating entity structure (some businesses can deduct state taxes at the entity level)

Sunset provision: This increase expires after 2029 unless extended. Plan accordingly for long-term tax strategies.

Standard Deduction Increase for 2025

The 2025 standard deduction increased to:

• Single: $15,750
• Head of Household: $23,625
• Married Filing Jointly: $31,500

Impact on itemizing decision:

With higher standard deductions, fewer taxpayers will benefit from itemizing. However, with the increased SALT cap, more California taxpayers might exceed the standard deduction.

Example: A married couple in Fremont with:

• Mortgage interest: $20,000
• SALT (capped): $40,000
• Charitable contributions: $5,000
• Total itemized: $65,000

Their itemized deductions ($65,000) far exceed the standard deduction ($31,500), making itemizing worthwhile. Under the old $10,000 SALT cap, their itemized total would only be $35,000—barely above the standard deduction.

Action item: Run calculations comparing itemizing vs. standard deduction for both 2025 and 2026. The optimal strategy may differ year-to-year.

New Limitations on Itemized Deductions

The law introduced new restrictions for high earners:

Charitable deduction floor: New 0.5% of income minimum Overall deduction haircut: Top tax bracket taxpayers face new limitations on total itemized deduction value

Who's affected: High-income taxpayers in the 37% bracket

Example: If you have $300,000 in income:

• Charitable deduction floor: $1,500 (0.5% of $300,000)
• You can only deduct charitable contributions exceeding $1,500

Planning strategies:

• Bunch charitable contributions into alternating years
• Use donor-advised funds to exceed the floor
• Consider qualified charitable distributions (QCDs) from IRAs if over age 70½

Child Tax Credit Enhancements Made Permanent

Nonrefundable credit: Increased to $2,200 (effective 2026) Refundable portion (Additional Child Tax Credit): $1,700 in 2025, then inflation-adjusted

Previously: These enhanced credits were set to expire Now: Made permanent under the One Big Beautiful Bill

Bay Area family business owners:

This permanent enhancement provides predictability for family financial planning. Business owners with children can rely on this credit long-term.

Phase-out thresholds:

• Begins at $400,000 AGI for married filing jointly
• $200,000 for single filers

California State Tax Changes

While the One Big Beautiful Bill is federal legislation, California businesses also need to track state-level developments.

California S Corporation Tax

Rate: 1.5% of net income Minimum franchise tax: $800 annually

No change expected for 2026: California's S corporation tax remains consistent.

Election strategy: For LLCs, electing S corporation status can save on self-employment taxes federally while adding 1.5% state tax in California. The analysis must weigh:

• Federal self-employment tax savings (15.3%)
• California's 1.5% S corp tax
• Additional payroll tax and compliance costs

Example: Union City LLC with $150,000 net income:

As LLC:

• Self-employment tax (federal): ~$21,200
• No California S corp tax: $0

As S corporation: (assuming $80,000 reasonable salary)

• Payroll taxes (federal): ~$11,300
• California S corp tax: $2,250
• Total: ~$13,550
• Savings: ~$7,650 annually

This analysis requires professional guidance as individual circumstances vary.

California LLC Fees Based on Gross Receipts

California charges annual fees to LLCs based on gross receipts:

• $0 - $249,999: $0 fee
• $250,000 - $499,999: $900
• $500,000 - $999,999: $2,500
• $1,000,000 - $4,999,999: $6,000
• $5,000,000+: $11,790

Plus: $800 annual franchise tax

Planning tip: LLCs electing S corporation status avoid the gross receipts fee (but still pay the $800 minimum and 1.5% income tax).

For growing businesses: If you're approaching $250,000 in gross receipts, an S corporation election could save $900+ in California fees alone.

Energy Tax Credit Terminations

Section 179D: Energy-Efficient Commercial Buildings

Terminated: For property construction beginning after June 30, 2026

Current benefit: Deduction for installing energy-efficient property in commercial buildings (up to $5.00 per square foot for qualifying improvements)

Action item: If you're planning building improvements or new construction, accelerate projects to begin before July 1, 2026 to claim this deduction.

Bay Area relevance: Many Silicon Valley companies are building or renovating offices. This timeline matters for project scheduling.

Section 45L: Energy-Efficient Home Credit

Terminated: After June 30, 2026

Who was affected: Contractors building energy-efficient homes

Bay Area builders: Plan construction schedules to maximize credits for homes completed before the deadline.

Estate Tax Exemption: Permanent Increase

Previous: ~$14 million per individual (2024 level) New: $15 million per individual (effective 2026) Status: Made permanent

Previously: Set to expire after 2025 Now: Permanent at increased level

Planning implications for business owners:

Many Bay Area business owners have significant wealth in real estate and business equity. This increased exemption provides:

• Greater certainty for estate planning
• More flexibility in succession planning
• Potential for dynasty trust strategies

Married couples: Can combine exemptions for $30 million in estate tax-free transfers

Action item: Review estate plans with an attorney. The permanent increased exemption may allow for different strategies than those designed for a lower, temporary exemption.

Comparison Tables: Old vs. New Rules

1099 Reporting Threshold

SALT Deduction Cap

Child Tax Credit

Timeline for Implementation

January 1, 2026: Most provisions take effect April 15, 2026: First returns filed under new rules June 30, 2026: Deadline for certain energy credits Through 2029: SALT deduction increase remains in effect Ongoing: Permanent provisions remain unless changed by future legislation

Industry-Specific Impacts

Technology Startups

Positive:

• Increased SALT deduction helps high-earning founders
• Reduced 1099 compliance burden for contractor-heavy operations
• Potential meal deduction restoration

Negative:

• Moving expense repeal affects recruiting
• Energy credit terminations for green tech construction projects

Strategy: Focus on compensation planning and equity tax efficiency

Professional Services (Consulting, Legal, Medical)

Positive:

• SALT deduction increase benefits high-earning professionals
• Potential Section 199A QBI deduction modifications

Negative:

• SSTB limitations still apply to QBI deduction
• Itemized deduction limitations for high earners

Strategy: Evaluate entity structure (S corp vs. partnership) under new QBI rules

Real Estate and Construction

Positive:

• Increased estate tax exemption helps with succession planning
• Short-term opportunity for energy credits

Negative:

• Energy credits terminating after June 30, 2026
• Moving expense repeal affects worker recruitment

Strategy: Accelerate energy-efficient projects before June 30, 2026 deadline

Retail and Hospitality

Positive:

• Reduced 1099 burden for contractor payments
• Meal deduction potential for employee meals

Negative:

• Limited direct impact from major provisions

Strategy: Review contractor classifications and meal programs

Common Mistakes to Avoid in 2026

Mistake 1: Not Adjusting Contractor Reporting

Some businesses may continue issuing 1099s to contractors paid between $600-$1,999, creating unnecessary paperwork.

Solution: Update your accounting systems to flag the new $2,000 threshold.

Mistake 2: Overlooking SALT Deduction Planning

Taxpayers may continue assuming the $10,000 cap when it's now $40,000.

Solution: Recalculate whether itemizing makes sense. Many California taxpayers who gave up on itemizing should reconsider.

Mistake 3: Ignoring Energy Credit Deadlines

Missing the June 30, 2026 construction start deadline for Section 179D projects.

Solution: Review capital projects now and accelerate timelines where beneficial.

Mistake 4: Failing to Update Estate Plans

Operating under old estate tax exemption assumptions when planning is now permanent at a higher level.

Solution: Schedule an estate planning review to optimize under the new permanent rules.

Mistake 5: Not Modeling Entity Structure Changes

Assuming your current business structure (LLC vs. S corp vs. C corp) is still optimal under the new QBI and other rule modifications.

Solution: Run a comprehensive entity structure analysis with your tax advisor.

Action Items for Bay Area Businesses

Immediate (Q4 2025):

• Review contractor payment systems for new $2,000 threshold
• Model SALT deduction impact for 2025 year-end planning
• Evaluate equipment purchases for Section 179D before June 30, 2026
• Assess meal program documentation for deductibility
• Calculate estimated taxes for 2026 under new rules

Early 2026:

• Update payroll and HR policies for moving expenses
• Revise offer letters to reflect moving expense tax treatment
• Recalculate quarterly estimated tax payments
• Schedule entity structure analysis

Mid-2026:

• Review year-to-date results against projections
• Adjust estimated tax payments if needed
• Plan for Q4 tax strategies

Ongoing:

• Monitor for regulatory guidance on new provisions
• Stay informed about California state-level changes
• Track energy credit deadlines for construction projects

How FK Services Can Help

Navigating these complex tax law changes requires expert guidance. FK Services specializes in helping Bay Area businesses understand and optimize under new tax legislation.

Our services:

• Comprehensive tax law change impact analysis
• Entity structure optimization (LLC vs. S corp vs. C corp)
• Estimated tax planning and calculations
• Business meal program documentation and compliance
• International tax compliance and reporting
• Multi-state tax planning for expanding businesses
• Estate and succession planning integration

With over 25 years serving California businesses, we've guided clients through multiple major tax law changes. We understand how these federal changes interact with California's unique tax environment.

Conclusion

The One Big Beautiful Bill Act represents the most significant tax legislation since 2017, with wide-ranging implications for California businesses. From the increased SALT deduction providing meaningful relief to high-tax state taxpayers, to the simplified 1099 reporting reducing administrative burden, these changes require careful analysis and strategic planning.

For Bay Area businesses, the intersection of federal changes with California's existing tax structure creates both opportunities and complexities. The key is proactive planning: understanding how these changes affect your specific situation and adjusting strategies accordingly.

Don't navigate these changes alone. Professional guidance ensures you maximize benefits while maintaining compliance with new requirements.

Disclaimer: This article provides general information and should not be considered specific tax advice. Tax laws change frequently, and individual circumstances vary. Consult with FK Services or a qualified tax professional for advice tailored to your specific situation.