Key Takeaways:
- The Work Opportunity Tax Credit expired on December 31, 2025; unless Congress extends this credit, employers will not be able to use it in 2026.
- Section 199A pass-through deduction is now permanent, with relaxed phaseout rules for some high-income business owners.
- Expanded QSBS, R&D, and Opportunity Zone incentives offer powerful long-term tax benefits — but require proactive planning.
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Private companies are facing a shifting tax landscape shaped by the One Big Beautiful Bill Act (OBBBA) and evolving IRS guidance. While some incentives are set to expire, others have been made permanent or expanded — offering valuable opportunities for tax planning, investment structuring, and long-term value creation.
As you look ahead to 2026, these upcoming shifts in key tax credits should be on your radar:
With key tax credits set to expire and new rules taking effect, 2026 isn’t just a deadline — it’s a planning opportunity.
Work Opportunity Tax Credit (WOTC) Expired
The Work Opportunity Tax Credit (WOTC) provides a federal income tax credit to employers that hire individuals from certain targeted groups — including veterans, individuals with disabilities, and long-term unemployed workers. However, the OBBBA did not extend the WOTC and the credit expired on December 31, 2025. Employers that previously relied on this credit should monitor legislative developments for potential retroactive extension and evaluate how its expiration affects workforce planning and hiring incentives.
Section 199A Deduction Made Permanent
The OBBBA brings welcome certainty by making permanent the 20% deduction for qualified business income under Section 199A. This deduction — long viewed as a foundational benefit for pass-through entities — is also adjusted under the new law to ease phaseout thresholds for certain taxpayers. While the deduction is still unavailable for specified service trades or businesses (SSTBs), planning opportunities may exist to segregate qualified activities or meet safe harbor requirements (e.g., for rental real estate under Rev. Proc. 2019-38).
Federal and State R&D Credit Updates
Research credit continues to be a powerful incentive for innovation, but the IRS is tightening its administration. Updates to Form 6765, partially implemented for the 2025 tax year, signaling the agency’s focus on substantiation and transparency. Section G reporting — requiring disclosure of the top 80% of qualified research expenses (QREs) by business component — becomes mandatory in 2026, while Section E already introduces new questions related to officer wages, acquisitions, and use of ASC 730.
At the same time, multiple states have revamped their own research and development (R&D) programs. Key state-level updates include:
- Arizona: Expanded use of the ASC method and refundable credits for small businesses.
- Arkansas: Up to 33% credits for strategic research or university collaboration.
- Connecticut: Expanded refundability and eligibility for single-member LLCs.
- Iowa: Transitioning to a targeted credit program for specific industries starting in 2026.
- Michigan: New refundable credit with tiered caps based on business size and collaboration.
- Minnesota: Partial refundability increases over 2025–2027.
- Texas: Expanded franchise tax credit and repeal of sales tax exemption for R&D equipment.
With increased audit scrutiny and differing documentation standards, both federal and state research credits now demand a more strategic and coordinated compliance approach.
QSBS Enhancements Under Section 1202
Qualified Small Business Stock (QSBS) treatment under Section 1202 remains a valuable tax planning tool for founders, investors, and private equity sponsors. The OBBBA enhances this incentive by increasing the gain exclusion cap from $10 million to $15 million for stock issued after July 4, 2025, with future inflation adjustments. It also introduces 50% and 75% gain exclusion thresholds for stock held for three and four years, respectively — expanding the planning window for exits that don’t meet the traditional five-year holding requirement.
In parallel, the qualified gross assets limit has been raised from $50 million to $75 million, allowing previously ineligible corporations to issue QSBS. These updates can open new structuring possibilities for middle-market deals and recapitalizations.
Qualified Opportunity Zone (QOZ) Program Permanency
One of the most significant long-term developments is the permanent extension of the QOZ program. The OBBBA preserves key features — including capital gain deferral and tax-free appreciation after 10 years — while introducing important changes. For example, the new law replaces the existing QOZ designations (which expire at the end of 2026) with rolling 10-year zone designations and adds higher basis increases (up to 30%) for investments in rural zones.
Compliance requirements for Qualified Opportunity Funds (QOFs) and Qualified Opportunity Zone Businesses (QOZBs) are also increasing, with new reporting mandates effective for tax years beginning after enactment. Taxpayers should reassess their geographic investment strategies and consider the timing of gains relative to the 2026 sunset on existing zones.
Real Estate Developers See Accounting Relief
The OBBBA provides targeted tax relief for real estate developers. For tax years beginning after 2025, real estate investment trusts (REITs) may increase their exposure to taxable REIT subsidiaries — with the cap on securities rising from 20% to 25% of gross asset value. Additionally, developers of residential condominiums may now use the completed contract method of accounting — rather than percentage of completion — for eligible projects beginning after July 4, 2025. This change allows for improved cash-flow matching and reduces the burden of premature income recognition.
However, the relief applies prospectively, and developers should evaluate whether existing projects remain subject to prior accounting method constraints.
Planning Ahead
Taken together, these developments reflect a broader pivot toward long-term incentive alignment, especially for private companies willing to engage in forward-looking planning. Whether you’re considering a QOZ investment, structuring a QSBS issuance, monetizing R&D credits, or navigating state-level programs, now is the time to act.
MGO’s team can help assess eligibility, navigate compliance changes, and design strategies that unlock value under both federal and state tax frameworks. Reach out to our team today to evaluate your tax credit opportunities and prepare for the changes ahead.