Year-to-Date Financial Reporting: The Foundation of Everything

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Most business owners treat tax season as a reactive exercise. Documents arrive in January, returns get filed by April, and the rest of the year passes without a second thought. That approach leaves money on the table – often a lot of it. June is the inflection point. Half the year is behind you. You have real numbers to work with. And every major tax planning lever – estimated tax payments, pass-through entity tax elections, bracket management, retirement contributions, entity structuring – is still available. By December, most of those doors are either closed or closing.

If you are not working on your tax situation more in June than you are in January, you are doing it wrong and you are following the crowd.

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You should be working on your tax returns more now than you do in December and January.

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Before any planning conversation can happen, the books need to be current. That means reconciled bank and credit card accounts, accurate profit and loss statements, and a clean balance sheet – all through at least May 31. This is not optional. Every projection, every estimated payment calculation, and every strategy discussed below depends on reliable year-to-date numbers. If yourbookkeeping is three months behind, the first priority is catching up.

For S-corporation owners, this also means reviewing officer compensation. If you have not taken a reasonable salary through the first half of the year, or ifyour payroll is running too high relative to net income, mid-year is the time to recalibrate. The IRS scrutinizes S-corp officer compensation closely, and getting it right is foundational to both payroll tax savings, retirement contribution planning, and the Qualified Business Income (QBI) Deduction.

Run Tax Projections Now – Not in December

A tax projection is a forward-looking estimate of your total federal and state tax liability for the year, based on actual year-to-date results and reasonable assumptions for the remaining months. It is the single most valuable deliverable your CPA can provide outside of the return itself. Here is what agood mid-year projection tells you:

Whether you are on track to owe a significant balance at filing, or whether you are overpaying through withholding and estimates. Where you stand relative to key income thresholds – the qualified business income deduction phaseout, the net investment income tax threshold, the additional Medicare tax threshold, and marginal bracket boundaries. Whether your current estimated payment schedule is adequate to avoid under payment penalties. Whether accelerating or deferring income and deductions between now and December 31 would produce a measurably better result.

Too many business owners wait until the fourth quarter to have this conversation. By then, the options narrow. You cannot undo nine months of payroll decisions, you cannot retroactively make a pass-through entity tax election in most states,and you cannot manufacture deductions that require lead time – like cost segregation studies or retirement plan establishment. June gives you the runway to act.

Estimated Tax Payments: Q2 Is Due June 15

The second quarter estimated tax payment for 2026 is due June 15. For business owners whoearn income that is not subject to withholding – which includes virtually every S-corporation shareholder, partner, and sole proprietor – estimated payments are the primary mechanism for staying current with the IRS and your state tax authority. Under payment penalties are real. The IRS charges interest on the shortfall for each quarter,and the rate adjusts quarterly based on the federal short-term rate. As ofearly 2026, the underpayment penalty rate remains elevated compared to historical norms. California imposes its own estimated tax penalty under asimilar framework. The safeharbor rules provide two paths to avoid penalties: pay at least 100 percent ofthe prior year tax liability (110 percent if adjusted gross income exceeds$150,000), or pay at least 90 percent of the current year liability. A mid-year projection tells you exactly where you stand against both benchmarks and whether your remaining payments need to increase.

Pass-Through Entity Tax Elections

One of the most significant state tax planning developments in recent years is the proliferation of elective pass-through entity taxes. These regimes allow S-corporations, partnerships, and LLCs taxed as partnerships to pay state income tax at the entity level, generating a federal income tax deduction that effectively circumvents the $40,000 ($20,000 if Single) state and local tax deduction cap imposedby the Tax Cuts and Jobs Act – reverts to a $10,000 maximum after MAGI reaches $600,000. California, New York, and the majority of states now offer some version of this election. The rules vary by state – some require annual elections, some require quarterly estimated payments at the entity level, and some have irrevocability provisions that make timing critical.

If your entity operates in a state with a pass-through entity tax regime and you have not yet evaluated whether the election makes sense for 2026, June is the time (in some states it's too late). Waiting until year-end often means missing election windows or failing to make required installment payments that are prerequisites to the deduction. For multi-state businesses, the analysis is more complex. Each state’s regime interacts differently with resident credits and nonresident withholding obligations. This is not a set-it-and-forget-it decision – it requires modeling against your specific facts.

Bracket Management and Phaseout Thresholds

Federal income tax is progressive, which means every additional dollar of taxable income is not taxed at the same rate. The difference between the 24 percent bracket and the 32 percent bracket, or between the 32 percent and 35 percent bracket, can represent tens of thousands of dollars in tax on relatively modest swings in income. Mid-year is when bracket management becomes actionable. With six months of actual data, you can project where your taxable income will land and evaluate whether it makes sense to accelerate deductions, defer income, increase retirement contributions, or time capital gains and losses to stay within a more favorable bracket. Beyond brackets, several critical tax benefits phase out at specific income levels:

Qualified Business Income Deduction (Section 199A). The 20 percent deduction for qualified business income begins to phase out for specified service trades orbusinesses – including accounting, consulting, law, health care, and financial services – at $191,950 for single filers and $383,900 for joint filers (2026t hresholds, indexed for inflation). Above those thresholds, the deduction is reduced and eventually eliminated entirely. If your income is near the phaseout range, even small adjustments to timing or entity structure can preserve asignificant deduction.

State and Local Tax (SALT) Deduction. The SALT deduction remains capped at $40,000 for most filers under current law. As discussed above, the pass-through entity tax election is the primary workaround, but it requires affirmative action and, in many states, mid-year estimated payments.

Net Investment Income Tax. The 3.8 percent net investment income tax applies tothe lesser of net investment income or the amount by which modified adjustedgross income exceeds $200,000 (single) or $250,000 (joint). For business owners with both active and passive income streams, managing this threshold can produce meaningful savings.

Child Tax Credit and Education Credits. These benefits phase out at lower income levels and are often overlooked by higher-income taxpayers who assume they donot qualify. A projection can confirm whether you are in or out.

The point is straightforward: you cannot manage what you do not measure. A mid-year projection converts these thresholds from abstract numbers into actionable planning targets.

Retirement Contributions: The Biggest Lever Most Owners Underuse

ForS-corporation owners, the combination of officer salary and employer profit-sharing contributions to a Solo 401(k) or SEP-IRA remains one of themost powerful tax reduction tools available. The 2026 contribution limits allowup to $23,500 in employee deferrals ($31,000 if age 50 or older, withadditional catch-up tiers for ages 60 through 63), plus employer profit-sharingcontributions of up to 25 percent of W-2 compensation – all pre-tax. For partnerships and sole proprietorships, the math differs but the opportunity is equally significant. Self-employment tax calculations, net earnings adjustments, and plan type all affect the maximum deductible contribution.

Mid-year is the ideal time to evaluate whether your current payroll and contribution strategy is optimized. If you need to establish a new plan, many plan types must be established by December 31 of the tax year (Solo 401(k)) or can be established up to the extended filing deadline (SEP-IRA). Starting the conversation now avoids the December scramble.

Entity Structure Review

Business growth, changes in ownership, new partners, and shifts in the nature of income can all create situations where the current entity structure is no longer optimal. Mid-year is a natural checkpoint to evaluate whether an entity conversion, restructuring, or new entity formation would improve the taxposition going forward.

Common scenarios include a sole proprietor or single-member LLC whose net income now justifies S-corporation election for payroll tax savings; a partnership evaluating whether a late S-election or check-the-box election would be beneficial; an S-corporation exploring conversion to C-corporation status to access the flat 21 percent corporate rate or to position for a Section 1202 qualified small business stock exclusion; and multi-entity structures where intercompany transactions, management fees, or rental arrangements need to be formalized or restructured. These decisions have long lead times, and some elections are irrevocable or have limited windows. Raising them in June means there is time to model the outcomes properly.

Capital Gains and Loss Harvesting

If you hold investments in taxable brokerage accounts, mid-year is the time to review unrealized gains and losses. Tax-loss harvesting – selling positions at a loss to offset realized gains – is a straight forward strategy, but it requires awareness of your overall capital gain and loss position for the year. For business owners who are also planning asset sales – real estate, business interests, or equipment – coordinating the timing of those dispositions with your investment portfolio can produce a materially better net result than addressing each in isolation.

What This Looks Like in Practice

A productive mid-year tax planning engagement typically involves current-year financial statements through at least May 31; a federal and state tax projection based on actual year-to-date results and reasonable assumptions; a review of estimated tax payments made to date against safe harbor benchmarks; identification of specific planning opportunities – retirement contributions, pass-through entity tax elections, bracket management, timing of income or deductions; and a written summary of recommended actions with deadlines. This is not a fifteen-minute phone call. It is a structured engagement that requires current data, technical analysis, and clear communication. But the return on that investment – measured in actual tax dollars saved – consistently out performs any other advisory service a business owner can purchase.

The Bottom Line

The tax calendar does not start in January. For business owners who want to minimize their tax liability legally and systematically, the real work happens in June and extends into August or September. Every month you wait narrows the options and reduces the potential savings. If you do not have a mid-year tax projection, get one. If you do not know where you stand onestimated payments, find out. If you have not evaluated the pass-through entity tax election, the QBI deduction phaseouts, or your retirement contribution strategy for 2026, now is the time.

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Schedule time with us if you want to talk more or need help.