Several significant federal tax provisions are changing in 2026, with direct implications for Tennessee businesses. This guide explains what's changing, what's expiring, and how to plan.
A Nashville commercial real estate developer takes bonus depreciation on a substantial equipment purchase in early 2026, expecting the same treatment he received in 2024. But the applicable bonus depreciation rate has dropped from 60% in 2024 to 40% in 2026 under the original TCJA schedule — a difference of six figures in deferred tax liability. Year-end surprises of this kind are avoidable with accurate planning.
The Tax Cuts and Jobs Act of 2017 introduced a series of provisions with scheduled sunset dates or step-down curves. Several of those reach significant milestones in 2026. Combined with ongoing Tennessee-level tax changes, business owners in the state face a materially different tax environment than they navigated in previous years.
TCJA (Tax Cuts and Jobs Act) — The major federal tax reform legislation signed in December 2017. Many TCJA provisions were temporary, with scheduled expirations or phase-downs between 2022 and 2025. Unless Congress acts to extend them, several beneficial provisions sunset at the end of 2025, taking effect in the 2026 tax year.
Bonus Depreciation — Allows businesses to immediately deduct a percentage of the cost of eligible property in the year it is placed in service, rather than depreciated over the asset's useful life. The TCJA provided 100% bonus depreciation for property acquired after September 27, 2017, with a scheduled phase-down beginning in 2023.
The following federal provisions have reached significant inflection points for the 2026 tax year (returns filed in 2027 for calendar-year taxpayers):
Bonus Depreciation: 40% in 2026. Under the original TCJA schedule, bonus depreciation phases down at 20 percentage points per year after the 100% period: 80% (2023), 60% (2024), 40% (2026). For businesses making significant capital expenditures, this reduction means a greater portion of the asset cost must be spread over the standard MACRS depreciation schedule rather than expensed immediately. Tennessee businesses should review their 2026 capital expenditure plans in light of this phase-down and consider whether accelerating qualifying purchases to 2025 (60%) delivers a net tax benefit after accounting for other factors.
Section 199A Pass-Through Deduction: Scheduled Expiration. The 20% deduction for qualified business income from pass-through entities (S corporations, partnerships, sole proprietorships) was enacted as a temporary TCJA measure. Without Congressional extension, this deduction expires after the 2025 tax year. If the deduction lapses, pass-through business income that previously received a 20% deduction will be taxed at the owner's full individual marginal rate — a potentially substantial increase for profitable closely held Tennessee businesses. Monitor legislative developments closely, as extension proposals have been under discussion.
Individual Income Tax Rate Restoration. The TCJA reduced individual marginal rates and adjusted brackets on a temporary basis. These reductions also expire after 2025. For S corporation and partnership owners, higher individual rates affect the tax cost of business profits flowing through to personal returns. Tennessee business owners with significant pass-through income should model their 2026 tax position under both scenarios — extension and expiration.
Estate Tax Exemption Reduction. The TCJA doubled the federal estate and gift tax exemption to approximately $12 million per person (indexed for inflation). This higher exemption is also temporary and scheduled to revert to pre-TCJA levels (approximately $7 million in inflation-adjusted terms) after 2025. Tennessee business owners with significant business assets should review estate planning structures before the exemption reversion, particularly if business succession involves estate transfers.
Tennessee's business tax landscape has its own specific features that affect structuring decisions.
Tennessee Excise Tax: Tennessee imposes a corporate excise tax at 6.5% on net earnings apportioned to Tennessee. This applies to corporations, LLCs taxed as corporations, and other entities subject to Tennessee franchise/excise tax. Tennessee's excise tax treatment generally conforms to federal taxable income with modifications — including Tennessee-specific deductions and add-backs. Understanding how federal changes (bonus depreciation adjustments, Section 199A expiration) interact with Tennessee conformity rules requires careful analysis.
Tennessee Franchise Tax: In addition to excise tax, Tennessee imposes a franchise tax at $0.25 per $100 of the greater of the entity's net worth or the book value of real and tangible property owned or used in Tennessee. This tax applies regardless of profitability — a significant distinction from the excise tax. Businesses holding significant Tennessee real estate or equipment have material franchise tax exposure even in loss years.
Tennessee Hall Income Tax Repeal: Tennessee's Hall Income Tax on investment income was fully repealed effective January 1, 2022. This repeal is now fully in effect and no longer represents a planning consideration — but business owners with holdover planning structures designed to minimise Hall Tax may have structures worth revisiting for simplification.
Under the original TCJA phase-down schedule, bonus depreciation for qualifying property placed in service in 2026 is 40% (down from 60% in 2024 and 80% in 2023). The remaining 60% of the cost must be depreciated over the standard MACRS schedule. Check with your tax counsel for any legislative changes to this schedule before making major capital purchases.
The 20% qualified business income deduction under Section 199A was enacted as a temporary TCJA measure scheduled to expire after tax year 2025. Without Congressional extension, it will not be available for the 2026 tax year. Monitor legislative developments — extension proposals are under discussion — and model your 2026 tax position under both scenarios.
Tennessee's excise tax conforms to federal taxable income with modifications. Changes to federal bonus depreciation affect the income figure that flows into the Tennessee excise tax calculation. The interaction requires analysis at the state level: Tennessee may have its own conformity positions that differ from the federal treatment. Consult a Tennessee tax attorney to model the combined federal and state impact.
If your business interests plus other assets may approach the post-reversion exemption level (approximately $7 million per person in inflation-adjusted terms), consider completing any planned inter-generational transfers before the reversion date, reviewing existing trust structures designed around the current higher exemption, and ensuring your estate plan reflects current Tennessee succession law. Consult both an estate planning attorney and your accountant before implementing any transfer strategy.
This article is for informational purposes only and does not constitute legal or tax advice. Tax laws change frequently — consult a qualified tax attorney or CPA for advice specific to your business situation.