February 2026

Bigger Rental Deductions: What to Track (and What to Claim)

Many rental property owners are surprised to learn that federal tax law can limit their ability to deduct rental losses right away. In most cases, the IRS treats rental real estate as a passive activity, which generally means losses may be used only to offset passive income—such as profits from other rental properties. If you don’t have enough passive income to absorb the losses, the unused amount is suspended and carried forward.

The good news is that those suspended losses aren’t lost. They can typically be deducted in a future year once you have enough passive income, or when you sell the property that generated the losses. Even better, certain taxpayers may be able to deduct rental losses currently by qualifying for specific exceptions.

The Real Estate Professional Advantage

One of the most valuable exceptions is the real estate professional rule. If you qualify, a rental real estate loss may be treated as a nonpassive loss, which can potentially create immediate tax savings.

To be eligible for the real estate professional exception, you must meet both of the following requirements:

• Spend more than 750 hours during the year performing personal services in real estate activities in which you materially participate, and

• Those real estate hours must be more than half of the total time you spend delivering personal services (in other words, working) during the year.

Qualifying as a real estate professional is only part of the equation. To claim a nonpassive loss, you must also determine whether you materially participate in one or more rental properties.

Material Participation: Common Ways to Qualify

Generally, to meet the material participation standard for a rental real estate activity, you need to satisfy one of the following tests:

• Spend more than 500 hours on the activity during the year, or

• Spend more than 100 hours on the activity during the year and ensure no other individual spends more time than you do, or

• Ensure your time constitutes substantially all of the total time spent by all individuals on the activity during the year.

There are other ways to meet material participation, but these three are typically the easiest. Also note: your spouse’s participation counts for material participation purposes, but it does not count toward the real estate professional test.

If you qualify as a real estate professional and meet the material participation test for a property, losses from that property are generally treated as nonpassive and can usually be deducted in the current year.

If You Don’t Meet the Requirements

Even if you don’t qualify under the real estate professional rules, limited exceptions may still allow current deductions:

• Small landlord exception: If you own at least 10% of the property and actively participate, you may be able to treat up to $25,000 of losses as nonpassive. (Limited partnership interests don’t qualify.) This exception phases out when AGI exceeds $100,000 and is eliminated at $150,000.

• Seven-day rental rule: If the average rental period is seven days or less, the activity is treated as a business rather than real estate. Meeting a material participation test can make losses nonpassive.

• 30-day rental with services: If the average rental period is 30 days or less and significant personal services are provided, the activity is also treated as a business. Losses may be treated as nonpassive if a material participation test is met.

Make the Most of Your Tax Benefits

With proper documentation and a clear understanding of the available rules and exceptions, you can better position yourself to reduce your tax liability. Professional guidance can help ensure you apply these requirements correctly and capture the benefits you’re entitled to.

Your 2026+ Estate Plan Checklist: Updates Worth Making

Until recently, estate planning was clouded by significant tax uncertainty. The Tax Cuts and Jobs Act temporarily doubled the federal gift and estate tax exemption to an inflation-adjusted $10 million, but only for the years 2018 through 2025. For families with larger estates, that uncertainty eased in 2025, when legislation was signed into law increasing the exemption to $15 million for 2026, with annual inflation adjustments going forward and no scheduled expiration date. While this change offers more long-term clarity, it still doesn’t guarantee permanence—Congress could reduce the exemption in the future.

If your estate is substantial, transferring assets to loved ones or to trusts sooner rather than later may be advantageous. Making transfers while the exemption is higher can help lock in potential tax savings if future legislation reduces the exemption amount.

Building Flexibility into Your Plan

What if you want to take advantage of today’s higher exemption but aren’t ready to give up access to significant wealth? Certain techniques can help you capture the benefit while retaining some flexibility.

Spousal lifetime access trust (SLAT). If you’re married, a SLAT can remove assets from your estate while allowing indirect access. A SLAT is an irrevocable trust created for the benefit of your children or other heirs, but it permits the trustee to make distributions to your spouse if needed—potentially benefiting you as well. To keep the assets excluded from your estate (and, if structured correctly, from your spouse’s estate), you generally should not serve as trustee. Also, the trust must be funded with separate property, not marital or community property.

A key consideration: if your spouse dies, you lose the access “safety net.” Some couples create two SLATs naming each other as beneficiaries, but the plan must be carefully structured to avoid the reciprocal trust doctrine, which could negate the intended tax benefits.

Special power of appointment trust (SPAT). A SPAT is an irrevocable trust where you grant a special power of appointment to a spouse or trusted friend, giving them the ability to direct distributions to you. Properly designed, the assets are removed from your estate, can be sheltered from gift tax using the current exemption, and—so long as you are neither trustee nor beneficiary—may offer creditor protection.

Balancing Tax Savings and Control

Many strategies exist to reduce gift and estate taxes (and other taxes, such as income taxes) while preserving your financial security.

Self-Directed IRAs Explained: More Options, More Responsibility

You have until April 15, 2026—the tax filing deadline—to make 2025 contributions to an IRA. If you’re looking to move beyond the traditional mix of stocks, bonds, and mutual funds, a self-directed IRA can provide greater autonomy and diversification. However, that flexibility comes with added complexity and higher risk of costly tax mistakes.

Put Investment Decisions in Your Hands

A self-directed IRA is simply an IRA that gives you more control over investment choices. While most traditional and Roth IRAs limit you to conventional options such as stocks, bonds, and mutual funds, self-directed IRAs (available through certain financial institutions) may allow you to invest in a much broader range of assets. These can include real estate, closely held stock, precious metals, and commodities such as lumber, oil, and gas—potentially offering diversification and higher returns.

A self-directed IRA can be structured as a traditional IRA or Roth IRA, and it may also be available through a SEP or SIMPLE arrangement. Keep in mind that SEP and SIMPLE IRAs have additional rules and different deadlines.

Steer Clear of Tax Mistakes

The biggest risks with self-directed IRAs involve the prohibited transaction rules, which restrict dealings between an IRA and “disqualified persons.” Disqualified persons include the account holder, certain family members, businesses controlled by the account holder or their family, and certain IRA advisors or service providers.

Examples of prohibited activities include selling property to the IRA, lending money to it, buying property from it, providing goods or services to it, guaranteeing its loans, pledging IRA assets as loan security, receiving compensation from the IRA, or personally using IRA assets. These restrictions make it nearly impossible for an IRA owner to actively manage a business or real estate held in the account.

The penalty is severe: the IRA can be disqualified, with assets treated as distributed on the first day of that year, triggering income taxes and potentially penalties.

Is It the Right Fit?

A self-directed IRA can be a powerful tool for diversification, but it isn’t a strategy to adopt lightly. Understanding the rules, risks, and responsibilities is essential before investing retirement assets in alternatives.

2026 Tax Shifts for Business Owners: The Quick Breakdown

Here’s a quick snapshot of several significant tax law changes taking effect this year:

• Section 179 expensing increases. The Section 179 expensing limit rises to $2.56 million, and the phaseout threshold increases to $4.09 million (up from $2.5 million and $4 million, respectively, for 2025).

• Section 199A (QBI) phase-in ranges expand. The income ranges over which the Section 199A qualified business income deduction limitations phase in are expanding, generally to $201,750–$276,750 (up from $197,300–$247,300 for 2025). For married couples filing jointly, the ranges are double those amounts.

• Excess business loss threshold decreases. The threshold for the excess business loss limitation is reduced to $256,000 (down from $313,000 for 2025). For joint filers, the threshold is double that amount.

• Cash method accounting limit increases. The limitation on using the cash method of accounting increases to $32 million (up from $31 million for 2025).

• Certain clean energy incentives are eliminated. Some clean energy incentives are being eliminated, including the Section 179D deduction for energy-efficient commercial buildings and the alternative fuel vehicle refueling property credit—both after June 30, 2026.

Divorce and Taxes: Who Claims the Child Tax Benefits?

After a divorce or legal separation, IRS rules determine which parent can claim many child-related federal income tax benefits. In general, the parent with whom the child spends the most nights during the year is considered the custodial parent and is entitled to claim the child for most tax breaks. However, if certain tests are met, the custodial parent may release to the noncustodial parent the right to claim the child for specific tax benefits. Even with a release, some benefits—such as head of household filing status and the child and dependent care credit—remain with the custodial parent. The custodial parent may also revoke the release. These rules are complex.

Wrap It Up Right: Tax To-Dos Before You Close Your Business

Closing a business can feel overwhelming, but it’s critical not to overlook key tax responsibilities. You’ll need to file a federal income tax return for your business’s final year. If you have employees, make any final federal tax deposits and file required employment tax reports. If you used independent contractors and paid anyone $600 or more in your final year ($2,000 for 2026, indexed for inflation after that), be sure to report those payments.

You should also cancel your employer identification number (EIN) by sending the IRS a letter with the EIN, business name and address, and the reason you’re closing the account. Finally, keep records of tax returns, employment tax payments, and any business property. Contact our office for help.

Build an 8–12 week cash-flow forecast

Here’s the most impactful February finance move for a small business: build an 8–12 week cash-flow forecast. Unlike a profit-and-loss report, a cash forecast shows when money will actually enter and leave your bank account, helping you avoid surprises and make confident decisions.

Start by listing all expected cash inflows by week: customer invoice payments, POS sales deposits, subscriptions, and any other income. Be realistic—use your average collection time and note overdue accounts separately. Next, list cash outflows by week: payroll, rent, utilities, loan payments, vendor bills, insurance, software subscriptions, and planned purchases. Don’t forget tax obligations, such as payroll taxes and estimated income taxes, because these can create sudden cash pressure.

Then calculate your projected ending cash balance each week (starting cash + inflows − outflows). This simple view highlights weeks where cash may dip below your comfort level. If you spot a shortfall, you can act early: accelerate collections, send invoices sooner, ask for deposits, negotiate vendor terms, pause nonessential spending, or adjust purchasing and staffing.

Update the forecast weekly in February. Even small changes—one late payment or an unexpected expense—can shift cash quickly.