2026 Tax Law Changes Will Require Businesses to Re-evaluate Capital Expenditure and Deductions

Recent federal tax legislation enacted in 2025 is set to significantly alter business tax planning for the 2026 fiscal year. Key changes involve the phase-out of enhanced bonus depreciation, the reintroduction of certain expired deductions, and shifts in the availability of various tax credits. These adjustments will directly impact a business's net tax liability, cash flow, and the economics of capital investment decisions.

The Change

The core of the 2026 tax landscape shifts away from the generous bonus depreciation provisions that allowed businesses to immediately deduct a large percentage of the cost of qualifying new and used property. Starting in 2026, bonus depreciation is scheduled to be significantly reduced. Simultaneously, several business-related tax deductions that expired in prior years are set to be reinstated, potentially offsetting some of the impact of reduced bonus depreciation. The expiration or modification of various tax credits also requires businesses to re-evaluate their eligibility and planning for credits related to research and development, energy efficiency, and employee welfare.

Who's Affected

• Small Business Operators (small-operator): Businesses that have historically relied on bonus depreciation to reduce upfront capital costs for equipment, vehicles, and other tangible assets will see a material change in their tax posture. The return of old deductions might offer some relief, but the immediate expensing benefit of bonus depreciation will be lessened, potentially increasing near-term tax obligations or requiring adjustments to cash flow forecasts for planned equipment upgrades.
• Entrepreneurs & Startups (entrepreneur): For startups and growth-stage companies heavily focused on scaling through capital investment, the altered depreciation schedules will impact the perceived cost of new assets. This could influence decisions about leasing versus buying, and may require adjustments to financial models presented to investors.
• Investors (investor): Tax-aware investors, particularly those managing portfolios with significant business assets or considering acquisitions, need to understand how these changes affect the valuation and post-tax returns of their holdings. The depreciation schedule of assets held on balance sheets will have a direct impact on taxable income and the need for future tax planning.
• Real Estate Owners (real-estate): Owners undertaking significant capital improvements on commercial or residential properties will find that the depreciation of these improvements will follow a less aggressive schedule compared to previous years if bonus depreciation is no longer fully applicable. This could affect the timing of tax deductions related to property upgrades.
• Tourism Operators (tourism-operator): Businesses in the tourism sector that frequently invest in new equipment (e.g., vehicles for tours, hotel furnishings, restaurant equipment) will experience changes in the tax benefits associated with these capital expenditures. Re-evaluation of asset acquisition timing and financing may be necessary.

Second-Order Effects

Hawaii's isolated economy means that shifts in national tax policy can have amplified local repercussions. The reduced immediate tax benefit from capital investments could discourage some businesses from undertaking timely upgrades to facilities and equipment. This, in turn, might slightly slow the adoption of newer, more efficient technologies, potentially leading to prolonged use of older assets, impacting operational efficiency and sustainability goals. Furthermore, a less favorable tax environment for immediate expensing could marginally reduce the incentive for businesses to expand capacity, indirectly affecting long-term job creation and wage growth momentum.

What to Do

Businesses should proactively engage with tax professionals to model the impact of these changes on their specific financial situations. Understanding the interplay between reduced bonus depreciation and reinstated deductions is critical for optimizing tax strategies. Consider the timing of any planned capital expenditures before the end of 2025. For those relying on specific tax credits, ensure you remain compliant with all new eligibility requirements.

Action Details: Businesses planning significant capital expenditures for 2026 should consult with a tax advisor by Q3 2025. Model the financial impact of both reduced bonus depreciation and re-instated deductions to determine optimal timing for asset acquisition and to adjust cash flow forecasts. Monitor IRS guidance on reinstated deductions and updated credit requirements.