Year-End Tax Planning for Medical Practices: 2026 Edition
The 2025 tax act made 100% bonus depreciation permanent, raised the Section 179 limit, widened the QBI phase-in range, and increased the SALT cap. Because health care is a “specified service trade or business” (SSTB), physician-owners have to plan around these rules more carefully than most business owners. The items below may be worth acting on before December 31.
Section 179 and Bonus Depreciation
For 2026, a practice can expense up to $2,560,000 of qualifying property under Section 179. The deduction begins to phase out at $4,090,000 of property placed in service. Qualifying property includes equipment, purchased software, and certain improvements to nonresidential buildings, such as roofs, HVAC, fire protection, and security systems. 3 Bonus depreciation is now permanently 100% for property acquired after January 19, 2025.
Section 179 cannot create a loss, but bonus depreciation can. Section 179 is the better tool for reducing income by a specific amount, such as getting under a QBI threshold. It can also be changed later on an amended return. Equipment must be placed in service by December 31 to count for 2026. Property expensed under Section 179 is excluded from the 40% test for the mid-quarter convention. Check your state’s rules as well: Delaware, for example, does not follow the federal bonus depreciation changes.
Getting Under the SSTB Threshold for the 20% QBI Deduction
For 2026, physicians qualify for the full QBI deduction if taxable income is at or below $403,500 (married filing jointly) or $201,750 (most other filers). The deduction phases out over $150,000 for joint filers and $75,000 for others, and is fully lost at $553,500 and $276,750. Within that range, every dollar of income removed restores part of the deduction.
Practices near the threshold have several options. They can accelerate deductible expenses into 2026, defer income into 2027, make deductible retirement contributions, fund HSAs, or bunch charitable gifts into a donor-advised fund. Some married couples may come out ahead filing separately, but compare total tax both ways first. Keep in mind that QBI is reduced by the deductible part of self-employment tax, self-employed health insurance, and retirement contributions.
Getting Around the SALT Cap with a Pass-Through Entity Tax
The 2026 State and Local Tax (SALT) individual itemized deduction cap is $40,400. It phases down above $505,000 of modified AGI by 30% of the excess, but not below $10,000. Many physicians therefore get little benefit from the higher cap. Under Notice 2020-75, a partnership or S corporation can elect to pay state income tax at the entity level and deduct it. That reduces the owners’ pass-through income and leaves their individual SALT deduction available for property taxes.
Some state pass-through entity tax programs expired after 2025, so confirm yours is still in effect for 2026. Check your state’s eligibility rules and election deadlines, make the payment by December 31, and include the deduction in your QBI projections.
Reasonable Compensation for S Corporation Owners
Physician-owners of an S corporation must take reasonable compensation before taking distributions. Reasonable means what similar businesses pay for similar services under similar circumstances. Courts weigh factors such as the owner’s duties, hours, qualifications, what comparable employers pay, and how salary compares to distributions.
For a medical practice, the documentation file should cover:
- Medical specialty. Use survey data for the physician’s own specialty and subspecialty.
- Clinical hours and productivity. Include clinical FTE, call coverage, and wRVUs or collections.
- Geographic region. Use regional pay data.
- Administrative duties. Record medical director or practice management roles.
- Return on capital. Separate income from ancillaries and employed providers (PAs, NPs, associate physicians), which reflects the practice’s investment rather than the owner’s personal services.
Record the analysis in the corporate minutes. Higher wages increase FICA and reduce QBI, but they also increase the retirement plan contributions the practice can make. Set salary at a defensible point within the range and true it up through payroll by December 31.
Stacking Retirement Plans
| 2026 Limit | Amount |
| 401(k) elective deferral | $24,500 |
| Catch-up, age 50+ / ages 60–63 | $8,000 / $11,250 |
| Total defined contribution additions | $72,000 |
| Compensation cap | $360,000 |
A 401(k) with profit sharing can reach the $72,000 total. Adding a cash balance plan lets older physicians shelter substantially more. When both plans cover the same person, combined deductions are generally limited to the greater of 25% of compensation or the cash balance plan’s required funding. However, the combined limit does not apply if employer 401(k) contributions stay at or below 6% of pay; above 6%, only the excess counts toward the limit. It also does not apply to cash balance plans that are not covered by PBGC insurance, which is typical for small professional practices. Solo practitioners can use a one-person 401(k).
Elective deferrals must come out of 2026 paychecks, so update elections before the last payrolls of the year. New for 2026, participants whose prior-year FICA wages exceeded $150,000 must make catch-up contributions as Roth contributions. Those contributions will not reduce taxable income, so leave them out of QBI projections.
Other Considerations
- Charitable gifts. Starting in 2026, itemized charitable deductions count only above 0.5% of AGI, so bunching gifts is more useful than before.
- Roth 401(k). Roth 401(k) contributions have no income limit, which makes them useful for physicians who earn too much for a Roth IRA.
- Health insurance for 2% owners. Health insurance for more-than-2% S corporation owners must be included in W-2 wages.
- Form 1125-E and ERC exams. Make sure officer time percentages on Form 1125-E agree with your compensation file. Practices selected for an employee retention credit exam should expect their compensation to be reviewed.
This article is general information for 2026 and is not advice for any particular taxpayer. Model how these strategies interact for your practice before year-end and contact us with any questions.
Article contributed by Terri L. Marakos CPA, CHBC
