The February Tax Planning Checklist: Last-Minute Moves Before Q1 Ends

Tax planning often receives attention in December, when year-end strategies dominate financial discussions and last-minute moves fill the final weeks of the calendar year. Yet February represents an equally critical window for tax planning that many businesses overlook. The first quarter of the new year contains multiple tax deadlines, provides opportunities to correct prior year positions, and offers a final chance to implement strategies before spring filing season locks in results that cannot be changed. Companies that treat February as merely a holding pattern between year end and tax day miss valuable opportunities to improve their tax positions and set up better processes for the current year. 

The tax landscape for 2026 differs significantly from prior years due to legislative changes, evolving IRS positions, and shifting compliance requirements. Businesses operating without current knowledge of these changes risk missing valuable opportunities or inadvertently creating compliance problems. The One Big Beautiful Bill Act passed in mid 2025 altered treatment of research expenses, bonus depreciation, and multiple other provisions. These changes affect not only 2025 returns that will be filed in the coming months but also planning for 2026. Source: https://lslcpas.com/are-rd-tax-credits-still-worth-it-in-2025/. Companies that understand how these pieces fit together can make informed decisions during February that create value throughout the year. 

State and Local Tax Obligations Require Immediate Attention 

While federal tax planning receives the most focus, state and local tax obligations often create the most urgent February deadlines. Many states impose entity level taxes, franchise taxes, or gross receipts taxes with due dates that fall early in the year. California’s $800 minimum franchise tax for LLCs and corporations is due by the 15th day of the fourth month after the beginning of the tax year, meaning many businesses face a March 15 or April 15 deadline depending on their fiscal year. Source: https://www.ftb.ca.gov/file/when-to-file/due-dates-business.html. Other states have similar early deadlines that require payment even before the federal return is due. 

Nexus reviews become particularly important during February. The combination of remote work arrangements, increased e-commerce activity, and aggressive state nexus positions means many businesses have inadvertently created filing obligations in states where they did not previously file. Following the Wayfair decision, economic nexus thresholds in many states require filing after relatively minimal sales activity. Some states set their thresholds at just $100,000 in sales or 200 transactions, meaning even small businesses with limited out of state activity may have filing obligations they do not know about. 

The consequences of missing state filing deadlines or failing to file in states where nexus exists can be severe. Many states assess penalties based on tax due plus interest calculated from the original due date, and some impose minimum penalties regardless of whether any tax is actually owed. More concerning, unfiled state returns leave the statute of limitations open indefinitely in many jurisdictions, meaning the state can go back multiple years and assess tax plus accumulated penalties and interest whenever they eventually discover the filing obligation. February provides time to conduct nexus reviews, register in any states where obligations exist, and prepare filings before deadlines arrive. 

Multi state businesses also need to consider their apportionment strategies during February. How a company allocates income across states can significantly affect its total state tax liability. Many states now use market based sourcing for services, meaning income is sourced to where customers are located rather than where the service is performed. Other states continue to use cost of performance or other methodologies. Understanding these rules and ensuring returns are prepared consistently becomes critical when operating across multiple jurisdictions. Companies that wait until the deadline to think about apportionment often miss opportunities to structure their activities in ways that produce more favorable outcomes. 

Retirement Plan Contributions Create Last Opportunities 

For businesses operating on a calendar year, certain retirement plan contributions can still be made for the 2025 tax year if action is taken early enough in 2026. Sole proprietorships, partnerships, and S corporations have until their tax filing deadline, including extensions, to establish and fund certain types of retirement plans for the prior year. This creates valuable planning opportunities that remain available through February and beyond for companies that file extensions. 

SEP IRAs represent one of the most flexible options for self employed individuals and small business owners. These plans can be established and funded up until the tax return due date including extensions, meaning a sole proprietor or partner who files an extension has until October 15, 2026 to make 2025 contributions. For 2025, SEP IRA contribution limits allow businesses to contribute up to 25% of compensation or $70,000, whichever is less. These contributions are deductible on the 2025 return, providing immediate tax benefits. 

Solo 401(k) plans offer even greater contribution potential for self employed individuals, allowing both employee deferrals and employer contributions up to $70,000 for 2025, or $77,500 for those age 50 or older. However, solo 401(k) plans have tighter deadlines than SEP IRAs. The plan must be established by December 31 of the tax year for which contributions are made, though funding can occur later. For businesses that already have solo 401(k) plans in place, February represents a valuable opportunity to finalize contribution amounts before tax returns are prepared. Those without plans cannot use this strategy for 2025 but should consider establishing plans during February for 2026 contributions. 

Defined benefit plans and cash balance plans provide the highest possible contribution levels, sometimes allowing contributions exceeding $200,000 annually for older, highly compensated business owners. However, these plans require actuarial calculations, ongoing administration, and typically multi year commitments. They also must be established before the end of the tax year for which contributions are claimed. February is too late to establish these plans for 2025, but it represents an excellent time to explore whether these strategies make sense for 2026. Companies with significant income that want to maximize retirement contributions and reduce taxable income should engage pension consultants during Q1 to model different plan designs and determine optimal contribution levels. 

Correcting Prior Year Positions Through Amended Returns 

February provides a strategic window to review prior year returns and consider whether amended filings could improve tax positions. The statute of limitations for amending returns to claim refunds is typically three years from the date the original return was filed or two years from the date tax was paid, whichever is later. For 2022 returns filed on April 15, 2023, the deadline to amend and claim a refund is April 15, 2026. This means February and March of 2026 represent the final opportunity to capture missed deductions or credits from 2022. 

Common situations that warrant amended returns include discovery of missed deductions during the preparation of subsequent years’ returns, identification of R&D credits that were not previously claimed, correction of depreciation methods or useful lives that were improperly applied, and recognition of losses that were not taken in the appropriate year. The decision to file an amended return requires weighing the potential refund against the risk of triggering audit examination. Amended returns receive closer scrutiny than original filings, and the IRS may examine other aspects of the return beyond the items being amended. 

For businesses that worked with new accountants or tax preparers in recent years, having current advisors review returns prepared by predecessor firms sometimes identifies opportunities for improvement. This review process should occur during February to allow adequate time for gathering additional documentation, calculating amended positions, and preparing the returns before statute of limitations deadlines expire. The alternative is discovering these opportunities in late March when insufficient time remains to properly execute the amendments. 

Particularly for pass through entities, amended returns create coordination challenges with shareholders or partners. When an S corporation or partnership amends its return, each owner must also amend their personal return to reflect their share of corrected items. This requires communication and cooperation from all parties, which takes time to coordinate. Beginning the process in February provides buffer for this coordination rather than creating emergency situations where shareholders must rush to amend their personal returns. 

Estimated Tax Strategy for 2026 

While most February tax planning focuses on finalizing 2025 positions, this period also represents a critical moment for planning 2026 estimated taxes. The first quarter estimated tax payment for calendar year corporations is due April 15, 2026, giving businesses only a brief window after finishing 2025 planning to project 2026 obligations. Underestimating these payments can trigger penalties, while overestimating ties up cash that could be used in the business. 

The safe harbor rules for estimated taxes provide certainty but require advance planning to utilize effectively. Corporations can avoid underpayment penalties by paying 100% of the prior year’s tax liability in estimated payments, regardless of what the current year’s actual liability turns out to be. For businesses expecting significant income increases in 2026, using prior year safe harbor can defer the cash impact of higher taxes until the return is filed. Conversely, businesses projecting decreased income in 2026 can reduce estimated payments based on current year projections, freeing up cash for operations, but must be prepared to support their calculations if the IRS questions whether estimates were reasonable. 

Pass through entities and their owners face more complex estimated tax planning. S corporations and partnerships do not pay entity level tax in most cases, but their income flows through to owners who must make estimated payments on their personal returns. Owners need projections from the entity to calculate their personal estimated tax obligations. When businesses operate on fiscal years or have complex allocations among owners, coordinating these projections requires significant lead time. February planning meetings between entities and their owners can ensure everyone understands projected distributions, expected tax liabilities, and required estimated payment amounts. 

Businesses that installed new equipment, completed acquisitions, or undertook significant capital projects during 2025 should review their depreciation strategies during February. The Tax Cuts and Jobs Act provisions for bonus depreciation and Section 179 expensing provide valuable opportunities to accelerate deductions, though recent legislation has made some adjustments. Bonus depreciation phases down in the coming years, making current year planning important for businesses that want to maximize immediate deductions. These decisions affect both 2025 final positions and 2026 estimated tax calculations. 

Documentation and Substantiation Review 

Tax positions are only valuable if they can be supported upon examination. February provides an opportunity to review whether documentation exists to substantiate positions taken on upcoming returns. The IRS has increased audit rates for businesses in certain industries and certain size ranges. Companies with aggressive positions, large deductions relative to income, or loss years face higher examination risk. Ensuring documentation exists before filing reduces stress if the IRS selects the return for audit. 

Vehicle and mileage documentation represents one of the most commonly disallowed deductions in IRS examinations. Businesses claiming vehicle deductions need contemporaneous mileage logs showing business purpose, destination, and miles driven for each trip. Reconstructed logs created after the fact rarely survive audit scrutiny. February is too late to create 2025 logs if they do not exist, but it provides a critical reminder to implement tracking systems for 2026. Simple apps or logbook systems can capture this information with minimal effort throughout the year, but only if the system is implemented before miles are driven. 

Meal and entertainment expense substantiation has become more complex following tax reform changes. Knowing which meals are 100% deductible versus 50% deductible, which entertainment expenses are deductible versus nondeductible, and what documentation is required for each category demands attention to detail. Reviewing how these expenses were tracked during 2025 and whether improvements are needed for 2026 should occur during February before a full year of poorly documented expenses accumulates. 

Home office deductions, employee business expenses, and other areas that historically attract IRS attention deserve special review during February. Understanding the current law requirements, confirming that fact patterns actually support the deductions being claimed, and ensuring appropriate records exist can prevent problems down the road. For positions that cannot be adequately supported, February provides time to adjust returns before filing rather than defending weak positions later. 

The Value of Specialized Guidance 

Tax planning has become increasingly specialized as the code grows more complex and compliance requirements evolve. The February window represents a final opportunity to engage expert guidance before returns are filed and positions become locked in. Escalon works with growing businesses to provide year round tax planning support that ensures companies capture available benefits while maintaining solid compliance. This includes projecting tax liabilities throughout the year, identifying planning opportunities as situations change, and ensuring proper documentation and support for positions taken. 

The relationship between ongoing financial management and effective tax planning cannot be overstated. Companies that maintain organized books throughout the year, properly classify transactions as they occur, and track projects or activities with tax significance find themselves in much stronger positions when February arrives. Those scrambling to organize their records after year end inevitably miss opportunities and make errors that could have been avoided with systematic processes. Outsourcing financial operations to firms with tax expertise ensures that daily transaction processing happens with tax consequences in mind, creating a foundation where February planning sessions focus on strategy rather than data cleanup. 

Taking Action Before Time Runs Out 

February is a month of both reflection and action for tax planning. It represents the final window to review prior year positions, implement remaining strategies, and identify opportunities before spring filing deadlines close the door on options. Companies that approach February strategically, with clear understanding of their tax situation and proactive planning for both completion of 2025 returns and optimization of 2026 positions, consistently achieve better outcomes than those treating this period as downtime between year end and tax day. The businesses that invest time and attention during February build not only better current year results but also better systems and processes that pay dividends in future years.