2026 Tax Cliff Guide for Texas Ranch Families

Effective January 1, 2026

Four Tax Law Changes That Hit Texas Business Owners Hardest

When the TCJA sunsets, these four provisions expire simultaneously — creating a compounding effect that standard tax planning cannot absorb without proactive strategy.

QBI / Pass-Through

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QBI Deduction Eliminated

The 20% pass-through deduction for S-corps, LLCs, sole proprietors, and partnerships disappears entirely. A business owner showing $300K in net income loses a $60,000 deduction — worth $14,800–$22,000 in actual tax dollars depending on bracket.

Individual Rate

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Top Rate 37% → 39.6%

The individual top marginal rate climbs back to its pre-2017 level. Combined with Texas's absence of a state income tax (a comparative advantage), the federal rate increase still adds 2.6 cents on every dollar above the top threshold — $130,000 more per $5M of income.

Standard Deduction

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Standard Deduction Nearly Halved

For married filing jointly filers: the standard deduction drops from $29,200 (2025) to approximately $16,700 (2026). Business owners must now itemize more aggressively just to maintain the same taxable income baseline they had in 2025. More taxable income means a higher bill at every bracket level.

Estate Planning

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Estate Exemption Drops ~50%

The federal estate and gift tax exemption falls from approximately $13.6M to ~$7M per person. Texas business owners with equipment, land, mineral rights, livestock inventory, and permanent family protection benefits can cross the threshold faster than expected — triggering estate taxes their heirs cannot pay.

Tax Protection Strategies

Three Legal Ways to Offset the 2026 Tax Cliff

All three strategies work under current IRS code. All three must be in place before December 31, 2025 to generate 2025 deductions. None require waiting for Congress.

Section 162 · IRC

Section 162 Executive Bonus Plan

An employer pays a permanent family protection premium on behalf of a key employee or owner-employee as a deductible business expense under IRC Section 162. The business deducts the premium as compensation; the employee receives tax-advantaged accumulation inside a permanent family protection policy — an indexed-growth permanent protection strategy or guaranteed cash value contract.

Cash value inside the policy grows tax-deferred and can be accessed via tax-free policy loans and withdrawals in retirement. This effectively replaces the lost QBI deduction with a new deduction stream that also builds wealth. Unlike a retirement plan, there are no contribution limits tied to compensation, no plan document filing requirements (for simple arrangements), and no required contributions in down years.

For S-corporation owners who pay themselves a W-2 salary, the bonus is paid on top of salary, deducted by the corporation, and flows into the policy outside of payroll tax. For C-corps, it can be structured as selective executive compensation to reward key contributors without benefiting the entire staff.

●100% deductible compensation expense to the business

●Tax-deferred cash value accumulation for the executive

●Tax-free retirement income via policy loans — no 59½ restriction

●Works for S-corps and C-corps — can be selective

●No qualified plan contribution limits or filing requirements

●Family protection benefit provides estate liquidity for heirs

412(e)(3) · Defined Benefit

412(e)(3) Defined Benefit Pension

A 412(e)(3) plan is a special type of defined benefit pension plan that is fully funded using guaranteed insurance contracts — guaranteed income contracts and permanent family protection — rather than market investments. The IRS specifies under Revenue Ruling 74-299 that such plans are "fully insured" and therefore qualify for favorable treatment: higher contribution limits, simplified actuarial assumptions, and no minimum funding notice requirements.

Because the benefit is actuarially guaranteed from day one, the IRS allows significantly higher annual contributions than any 401(k) or profit-sharing plan. For a business owner over 50 targeting retirement in 10–15 years, annual deductible contributions often range from $100,000 to $300,000 or more, depending on age, salary, and years to retirement. Every dollar goes into guaranteed insurance products — no market risk, no ERISA investment committee, no fluctuating benefit.

The plan must be adopted and funded before December 31 of the year for which you claim the deduction. This means if you want a 2025 deduction — one that offsets the last year of QBI benefit and sets you up before the cliff — the plan must be in force and funded by December 31, 2025.

●100% of contributions are deductible as a business expense

●$100K–$300K+ annual deductions for owners over 50

●Guaranteed funding — no market exposure, no sequence risk

●Actuarially larger benefits for older, higher-compensated owners

●Must be established and funded before Dec 31 of tax year

●Can be combined with 401(k) plan for additional employee benefit

Estate Planning · Use It or Lose It

Estate Freeze Before Dec 31

If your combined net worth — including business equity, land value, equipment, livestock inventory, mineral rights, and permanent family protection benefit — approaches the $7M threshold, the coming exemption cut is not a theoretical concern. It is a math problem with a hard deadline.

Three tools are particularly effective for Texas business owners in the window before December 31, 2025. First, direct gifting up to the current $13.6M lifetime exemption ($27.2M for couples) transfers assets to heirs or irrevocable trusts with zero estate tax under current law — but only if completed before the cutoff. Second, a Grantor Retained Annuity Trust (GRAT) allows you to transfer appreciation of business or ranch assets at a minimal taxable gift, locking in growth outside your estate. Third, a Family Limited Partnership (FLP) or Family LLC can consolidate business interests, apply valuation discounts of 20–40%, and reduce your taxable estate while keeping operational control.

The critical point: once the TCJA expires on January 1, 2026, the IRS has confirmed there will be no "clawback" of gifts made at the higher exemption — but only if they are completed and documented before midnight on December 31, 2025. Partially executed plans do not qualify.

●Lifetime gifting up to $13.6M per person at 0% estate tax

●GRATs transfer appreciation at minimal gift tax cost

●FLPs/FLLCs apply 20–40% valuation discounts to business assets

●Indexed-growth strategy family protection benefit can provide liquidity to pay estate taxes

●Hard deadline: December 31, 2025 — no extensions, no clawback protection after

●Requires coordination between financial advisor, CPA, and estate attorney

Common Questions

Frequently Asked Questions About the 2026 Tax Cliff

What is the 2026 tax cliff? ▾

The 2026 tax cliff refers to the automatic expiration of most individual and pass-through business tax provisions in the Tax Cuts and Jobs Act (TCJA) of 2017 on December 31, 2025. Unlike normal annual changes, the TCJA included a "sunset" clause — meaning the provisions expire automatically unless Congress passes new legislation to extend them. Starting January 1, 2026, under current law: the top individual tax rate climbs from 37% to 39.6%, the 20% qualified business income (QBI) deduction disappears entirely, the standard deduction nearly halves from $29,200 to approximately $16,700 for married filers, and the estate and gift tax exemption drops from approximately $13.6 million to roughly $7 million per person. For Texas business owners, this is the single largest tax law change since 2017 — and unlike a rate change, the QBI deduction loss is a structural shift that cannot be offset simply by adjusting withholding or quarterly estimates. It requires proactive planning that must be in place before December 31, 2025.

How much will my taxes go up in 2026? ▾

The exact increase depends on your business structure, net income, and filing status, but the range for Texas business owners earning $200K–$2M is substantial. A sole proprietor with $300K in net business income could owe $18,000–$35,000 more in federal taxes in 2026 compared to 2025 with no action taken. This is driven by two simultaneous changes: the loss of the 20% QBI deduction (which reduced taxable income by up to $60,000 at that income level) and the top rate increase from 37% to 39.6%. The impact compounds further with the standard deduction reduction, which pushes more income into higher brackets even before considering the rate changes. A business owner at $500K net income could face $33,000–$55,000 in additional annual federal taxes. Use the Tax Liability Estimator on this page to calculate your specific exposure based on your income, expenses, filing status, and business type.

What is the QBI deduction and when does it expire? ▾

The Qualified Business Income (QBI) deduction, established by the TCJA under Section 199A, allows owners of pass-through entities — sole proprietors, S-corporations, LLCs, and partnerships — to deduct up to 20% of their qualified business income from federal taxable income. For a business owner with $300,000 in net business income, that is a $60,000 deduction worth $14,800–$22,200 in actual tax savings depending on their bracket. High-income owners in certain "specified service" trades (healthcare, law, consulting, financial services) may face additional phase-out rules, but most traditional business types — contractors, ranchers, retail, technology services, real estate, manufacturing — qualify for the full 20%. This deduction expires on December 31, 2025, unless Congress passes legislation to extend or make it permanent. As of this writing, no extension has been enacted, and business owners should plan for its complete elimination starting tax year 2026.

What is a Section 162 Executive Bonus Plan? ▾

A Section 162 Executive Bonus Plan is a strategy where a business pays an insurance premium on behalf of a key employee or owner-employee as a deductible business expense under IRC Section 162. The employee receives the premium payment as additional W-2 compensation — which is taxable to them — but the funds flow into a permanent family protection policy (typically an indexed-growth permanent protection strategy or guaranteed cash value contract) that accumulates cash value on a tax-advantaged basis. From the business's perspective, the premium is a fully deductible compensation expense that reduces taxable business income. From the executive's perspective, the policy builds tax-deferred cash value accessible for retirement income via tax-free policy loans — with no 59½ restriction and no required minimum distributions. The strategy works for S-corporations and C-corporations and can be selective, covering only specific executives without requiring broad employee coverage. It can be implemented before December 31, 2025 to begin generating deductions immediately and creating tax-advantaged wealth accumulation for the long term.

What is a 412(e)(3) plan and who qualifies? ▾

A 412(e)(3) plan is a special type of defined benefit pension plan that is fully funded using guaranteed insurance contracts — guaranteed income contracts and permanent family protection — rather than market investments. Because the benefit is guaranteed by the insurance products themselves, the IRS allows significantly higher annual contribution limits than standard 401(k) or profit-sharing plans. Business owners over 50 can often contribute $100,000 to $300,000 or more per year, and every dollar contributed is 100% deductible as a business expense. The plan works best for profitable, owner-operated businesses with stable income and a small workforce, where the owner is 45–65 years old and within 10–20 years of their target retirement date. The contribution amount is calculated actuarially — older owners with shorter time horizons can contribute more. Critically, the plan must be established and funded before December 31 of the tax year for which you want to claim the deduction. A 412(e)(3) established and funded in December 2025 generates a 2025 federal tax deduction worth potentially $50,000–$100,000 in actual tax savings.

Can I still qualify for the QBI deduction after 2025? ▾

Under current law, no. The Section 199A qualified business income deduction expires on December 31, 2025, and is not available for tax year 2026 or later unless Congress passes legislation to extend or make it permanent. Several legislative proposals have been introduced to extend the TCJA provisions, including proposals to make the QBI deduction permanent. However, as of this writing none have been enacted into law, and the legislative calendar makes passage before year-end uncertain. Business owners who are waiting for a legislative fix are gambling their financial exposure on an outcome they cannot control. The prudent approach is to plan assuming the deduction disappears and implement alternative deduction strategies — such as defined benefit pensions, executive bonus arrangements, and increased business expense planning — that work under current law regardless of what Congress does or does not do.

What happens to the estate tax exemption in 2026? ▾

The federal estate and gift tax exemption under the TCJA was set at $11.18 million per person in 2018 and has been indexed for inflation since, reaching approximately $13.61 million per person (or $27.22 million for married couples) in 2025. When the TCJA expires on December 31, 2025, the exemption automatically reverts to its pre-2018 level of approximately $5 million per person, indexed for inflation — estimated at roughly $7 million per person in 2026. For Texas business owners who have accumulated land, equipment, livestock, mineral rights, and permanent family protection benefits, crossing that $7 million threshold is more common than many realize. A rancher with 400 acres, a $2M equipment fleet, $1M in permanent family protection benefit, and a profitable LLC may be well above the 2026 threshold. Gifting strategies, GRATs, and family limited partnerships can lock in the current higher exemption but must be executed and documented before December 31, 2025. The IRS has confirmed there is no retroactive clawback for gifts made at the higher exemption — but only if completed before the expiration.

How do I protect my business from the 2026 tax increase? ▾

The most effective strategies involve front-loading deductions and shifting income into tax-advantaged structures before December 31, 2025. The three primary tools described on this page are: (1) a Section 162 Executive Bonus Plan using permanent family protection, which converts otherwise-taxed business compensation into tax-deferred accumulation outside of qualified plan limits; (2) a 412(e)(3) defined benefit pension plan, which allows $100K–$300K+ in annual fully deductible contributions and is particularly powerful for profitable owners over 45 who need to accelerate retirement savings; and (3) estate freeze strategies such as gifting, GRATs, or family limited partnerships to lock in the current $13.6 million exemption. These strategies work in combination — a business owner might use a 412(e)(3) to generate $150,000 in current-year deductions, a Section 162 plan to build supplemental executive retirement income, and a family limited partnership to protect ranch assets from estate tax. All must be legally established before December 31, 2025. Contact Kyle Ellison at HRP Financial at (806) 683-3110 or via the Calendly link on this page to schedule a strategic partnership session and determine which combination fits your specific business, income level, and timeline.

Strategy Matching Guide

Which Strategy Fits Your Business Profile?

Not every strategy is optimal for every business type and income level. Use this guide to identify which combination is most likely to apply to your specific situation, then confirm the details with Kyle on a strategic partnership session.

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Profile A

Sole Proprietor / LLC Single Member, Age 45–65

Income range: $150K–$600K net business income. Filing MFJ. Business expenses cover 25–40% of revenue. No other employees to cover in a retirement plan (or willing to include a small team).

Primary exposure: Loss of QBI deduction ($30K–$120K in taxable income re-exposed) plus standard deduction reduction ($12,500 more exposed income for MFJ). Combined federal tax increase: $12,000–$45,000+.

Best strategy combination: A 412(e)(3) defined benefit plan to generate $75K–$200K in annual deductions, layered with a Section 162 executive bonus plan to redirect additional net income into tax-advantaged policy accumulation. Estate freeze strategies are relevant if net worth approaches $5M–$7M.

Typical outcome: Offset 60–90% of the 2026 tax increase while simultaneously building a tax-free retirement income stream and protecting the business estate.

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Profile B

S-Corporation Owner, Age 40–60, W-2 Salary + Distributions

Income range: $200K–$1.5M total owner income (salary + distributions). S-corp pays a reasonable W-2 salary; excess profit distributed as non-self-employment income (major current advantage). Business has 1–10 employees.

Primary exposure: S-corp distributions currently qualify for QBI deduction — this disappears in 2026. At $400K in QBI, that is $80K in additional taxable income. Combined with the rate increase and standard deduction reduction, exposure can reach $25K–$65K per year.

Best strategy combination: Section 162 Executive Bonus Plan on the S-corp W-2 salary — premium paid as selective executive compensation, fully deductible. Layer a 412(e)(3) plan covering the owner (and optionally key employees) to generate $100K–$250K in plan deductions. Estate planning review if business value plus personal assets approaches $7M.

Typical outcome: Convert $100K–$300K/year from fully taxed income into either deductible plan contributions or tax-advantaged accumulation. Net after-tax income preserved or improved versus 2025 baseline.

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Profile C

Texas Rancher / Agricultural Operation, Any Age

Income range: Variable — typically $80K–$800K depending on cattle cycles, crop prices, and lease income. May have significant non-cash income (livestock appreciation, land basis vs. market value). Often structured as sole proprietorship or family LLC.

Primary exposure: Two-layer risk: (1) federal income tax increase from QBI loss and rate increase on profitable operating years, and (2) estate tax exposure from land appreciation. A 500-acre ranch appraised at $3,500/acre represents $1.75M in land alone — add equipment, cattle, and home equity, and the estate builds quickly toward $7M.

Best strategy combination: Estate freeze strategies are the top priority — family limited partnership with valuation discount, lifetime gifting under current $13.6M exemption, or a GRAT to transfer land appreciation. On the income side, a Section 162 plan or small defined benefit plan in profitable years provides current deductions without locking in large fixed contributions during lean years.

Typical outcome: Multi-generational asset protection achieved before the exemption cuts in half. Income tax exposure managed in profitable years without creating inflexible obligations during drought or commodity price cycles.

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Profile D

Professional Services / Consulting Firm, Age 35–55

Income range: $150K–$1M+ net income. Technology, IT services, marketing, healthcare administration, insurance, or other service businesses. May be a "specified service trade or business" (SSTB) under QBI rules, meaning QBI phase-out applies at higher income levels even before 2026.

Primary exposure: If income is above the SSTB phase-out threshold (~$383,900 MFJ in 2025), QBI may already be partially or fully phased out. The 2026 cliff still affects this group through the standard deduction reduction and rate increase — and eliminates any remaining partial QBI benefit for those in the phase-out range.

Best strategy combination: Section 162 Executive Bonus Plan provides immediate deductions with no SSTB limitation — it operates outside the QBI framework entirely. Paired with a 412(e)(3) or SEP/SIMPLE enhancement, the combination can generate $80K–$200K in annual deductions while building executive retirement wealth and permanent family protection.

Typical outcome: Income tax exposure dramatically reduced through strategies that operate independently of QBI eligibility. Business owner retires with both a defined benefit pension and a tax-free indexed-growth income stream in addition to traditional retirement accounts.

Not sure which profile fits you? A strategic partnership session with Kyle covers your specific numbers.

Schedule Strategic Partnership Session →

Gross Revenue	Net Business Income	2025 Est. Federal Tax	2026 Est. Federal Tax	Annual Increase	Monthly Impact
$150,000	$105,000	$9,500	$18,700	+$9,200	+$767/mo
$250,000	$175,000	$22,100	$37,800	+$15,700	+$1,308/mo
$350,000	$245,000	$33,500	$56,200	+$22,700	+$1,892/mo
$500,000	$350,000	$55,200	$88,900	+$33,700	+$2,808/mo
$750,000	$525,000	$97,400	$154,800	+$57,400	+$4,783/mo
$1,000,000	$700,000	$140,600	$221,400	+$80,800	+$6,733/mo
$1,500,000	$1,050,000	$222,800	$347,900	+$125,100	+$10,425/mo
Assumptions: Married Filing Jointly, Sole Proprietor. Expenses estimated at 30% of revenue. No other income. Standard deduction only (no itemizing). Estimates for illustrative purposes — consult a licensed CPA for your specific tax situation.

Texas Business Context

Why Texas Business Owners Face a Unique Double Exposure

Texas is one of nine states with no state income tax — a genuine competitive advantage that allows Texas business owners to keep significantly more of their earnings than counterparts in California, New York, or Illinois. A Texas business owner earning $500,000 in net income saves approximately $46,000–$52,000 per year compared to a California peer at the same income level, purely because Texas has no state income tax.

This advantage, however, creates a compounding risk at the federal level. Because Texas business owners do not lose a portion of their income to state taxes, a larger share of their income remains in the federal brackets. When the TCJA expires, the same structural shift — QBI loss, higher rate, lower standard deduction — hits Texas business owners with full force, with no state-level buffer to soften it.

There is also a Texas-specific estate planning risk. Land values across Texas Panhandle, the Panhandle, and Hill Country have appreciated dramatically over the past decade. Ranchers and agricultural landowners who purchased 500–2,000 acres at $500–$1,500 per acre 20 years ago may now hold land appraised at $2,500–$6,000 per acre. Combined with business equity, equipment, and permanent family protection, their total taxable estate can cross the 2026 threshold of $7 million per person without ever having considered themselves "wealthy" in the traditional sense.

The right strategy for a Texas business owner is not simply a retirement plan — it is a coordinated approach that accounts for federal tax exposure, the absence of state income tax, agricultural land appreciation, and multi-generational wealth transfer goals. That is exactly what HRP Financial specializes in.

No State Income Tax = Higher Federal Exposure

Texas's 0% state income tax means 100% of your income above the standard deduction flows into federal brackets. The TCJA rate increase hits harder with no state tax offset.

Ranch Land Appreciation Drives Estate Risk

Texas Panhandle, Panhandle, and Hill Country land values have tripled or quadrupled since 2005. Ranchers holding even 300–500 acres may be approaching the 2026 estate tax threshold when combined with business assets.

Agricultural Operations Need Specialized Planning

Texas ag operations involve unique deduction categories — livestock depreciation, Section 179 equipment, crop insurance, drought casualty — that interact with both QBI and estate planning strategies in specific ways.

Family Business Succession Is a Tax Event

Transferring a profitable ag or service business to the next generation in 2026 or later faces a dramatically different estate and gift tax landscape. A plan designed in 2025 under current rules could save heirs hundreds of thousands of dollars.

Kyle Is Bushland, Texas — Not a Call Center

Kyle Ellison is a 4th-generation rancher, based in Bushland, Texas. He understands ag operations, rural business, land valuation, and multi-generational family planning from personal experience — not a textbook.

What Not To Do

6 Mistakes Texas Business Owners Make Before the Tax Cliff

These are the planning errors that leave $20,000–$80,000 on the table — or expose estates to unnecessary tax burdens. Avoid every one of them.

✗ Waiting for Congress to Act

Many business owners are delaying planning because they believe Congress will extend the TCJA provisions. This is a gamble with real money on the outcome of a political process you cannot control. Even if an extension passes, it may not be retroactive to January 1, and it almost certainly will not restore any plans you needed to establish by December 31, 2025.

The fix: Plan for expiration. If Congress extends the provisions, your strategies still generate deductions, accumulate wealth, and reduce risk. Nothing is lost by being prepared.

✗ Assuming Your CPA Will Handle It

Your CPA's job is to file an accurate return based on what you did during the year. Most CPAs are not licensed to sell insurance products, are not compensation-motivated to proactively design forward-looking tax strategies, and are genuinely overwhelmed during tax season. A Section 162 or 412(e)(3) plan requires a licensed financial advisor to design, illustrate, and implement — not a return preparer.

The fix: Have your CPA and financial advisor working from the same plan. HRP Financial will provide any illustration your CPA needs to evaluate the deductibility of a proposed strategy.

✗ Underestimating Estate Value

Business owners consistently underestimate their taxable estate. They think in terms of cash and retirement accounts — not equipment appraisals, business goodwill, real estate fair market value, or the permanent family protection benefit that shows up in their gross estate. A rancher with 800 acres, a $1.5M equipment fleet, and a $2M term policy might have a $9M–$12M taxable estate and not realize it until a CPA does the math at the worst possible time — after death.

The fix: Request a rough estate inventory before December 31. Kyle can walk you through a back-of-napkin total in 20 minutes on a strategy call.

✗ Only Using a 401(k) for Retirement Savings

A 401(k) with a $23,500 employee contribution limit ($31,000 if over 50) is a strong foundation but it is not enough when the QBI deduction disappears and your effective tax rate jumps 3–6 percentage points. A business owner contributing the maximum 401(k) and no other strategy could see their after-tax income drop by $20,000–$60,000 per year in 2026 — with their 401(k) unchanged.

The fix: Layer a 412(e)(3) defined benefit plan on top of a 401(k)/profit-sharing plan for dramatically higher total deductions. The two plans can coexist in the same business.

✗ Assuming C-Corps Are Safe

Some C-corporation owners believe the TCJA expiration does not affect them because the flat 21% corporate rate is set by a different code section and does not expire with the individual provisions. This is partially true — the corporate rate holds. But C-corp owners still face the estate tax exemption reduction, and many use S-elections or flow-through distributions that expose their personal income to the higher individual rates and lost standard deductions.

The fix: Evaluate your C-corp's distribution strategy before December 31. Retained earnings and executive compensation structure both affect the personal tax picture even when the corporate rate holds steady.

✗ Treating This as a 2026 Problem

The TCJA expiration is a January 2026 tax event — but the strategies that prevent it are 2025 decisions. A 412(e)(3) plan generates 2025 deductions but must be established in 2025. A Section 162 plan begins generating deductions in the year it is implemented. Estate freeze strategies completed in late 2025 lock in the higher exemption permanently. If you wait until January 2026 to react, you have already paid the higher taxes and lost the planning window entirely.

The fix: The deadline is December 31, 2025 — not the 2026 tax filing deadline. Schedule a strategy call now to determine what is possible before year-end.

The TCJA Expires December 31, 2025. Are You Protected?

Four Tax Law Changes That Hit Texas Business Owners Hardest

QBI Deduction Eliminated

Top Rate 37% → 39.6%

Standard Deduction Nearly Halved

Estate Exemption Drops ~50%

Your Personal Tax Liability Estimator

Your Business Profile

Your Tax Exposure Estimate

Get Your Free Personal Tax Impact Report

✓ Report Request Received

Three Legal Ways to Offset the 2026 Tax Cliff

Section 162 Executive Bonus Plan

412(e)(3) Defined Benefit Pension

Estate Freeze Before Dec 31

Frequently Asked Questions About the 2026 Tax Cliff

Which Strategy Fits Your Business Profile?

Kyle Ellison

The Window Is Closing Fast

How to Protect Your Business Before the Deadline

Calculate Your Exposure

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2025 vs. 2026 Federal Tax — Texas Business Owner Scenarios