Dashboard: Why 2026 Will Be a Big Year for Small Businesses

Welcome to another 21 Hats dashboard. I'm Lauren Feldman and I'm [music] here with Jean Marks. Hello Jean. >> Hello Lauren. Welcome back. >> Thank you. It's great to have you here in the new year. Uh Jean, you wrote recently I think possibly something that took some people in your world by surprise. You're pretty bullish on 2026. Am I right? >> Yeah. I mean I uh I'm bullish >> for specifically for small businesses, I should add. Yeah, I would say that most of the people in my world, my world are also bullish about 2026. I guess I'm speaking about the manufacturers and distributors and construction companies and service companies that I speak to all throughout the year. Um, a lot of what I took from here for this piece for the Washington Times was based on conversations I had with a lot of people that are actually out there, you know, doing their thing. So yeah, I as you know and then again I've also you know read the surveys from the NFIB and the US Chamber and Bank of America and I think another one just came out on Friday from another bank also all with very strong optimism for um 2026 and um yes the point was like gee everybody's so bullish why why are they and um I am also bullish when I started looking into the reasons why >> so tell us what are those reasons Well, I mean, for starters, I do think there are a lot of tax things that are going to be kicking in um next year. um you know, for example, there will be I I think a lot of taxpayers that are earned overtime and we're in the service industry um are going to be getting refunds next year because um they've overpaid their taxes in 2025 and once they take deductions for it um they'll be seeing some money back and I think that extra money in their pocket will be um helpful in consumer spending. >> Explain that, Gene. What What are you referring to? Why have they overpaid? >> Sure. So let let's get into that really quickly. I know we were we were going to maybe do that separately, but we can cover it here. So um so for service workers that are out there, the millions of service workers that get tips, um there is now the course we've all about the no tax on tips, you know, rule. And the no tax on tips rule, let's not go overboard. It's not no tax on tips. It's just a it's a new deduction that you can take. So, when the year when you file your taxes, if you're a tipped worker, and if you're a business owner that has tipped workers, you need to be aware of this, and I'll tell you why in a minute. But when you file your taxes, um you now can take a deduction of up to $25,000 for your tipped income that you received that year in 2025. Now, a lot of people thought when they heard no tax on tips, it was going to be like, you know, right away they were going to get it in their paycheck, but that's not the case. It's a deduction that you're going to take on your tax return. Now, my guess is that a lot of people that are tipped workers, younger workers, or maybe not tax experts, weren't taking that into consideration during 2025. So whatever withholdings they had for their taxes, for their income, it's it's probably that they probable that most people did not change those withholdings when in effect they were probably overwithholding during 2025 because when they do their taxes for 2025, they're going to have this massive deduction that will reduce their income and therefore will owe less taxes than what they paid in and therefore they'll be owed a refund. So, we're telling a lot of our clients that have tipped workers um uh to to be aware of this. Um and we're telling a lot of people that we work with that are tipped workers, file your taxes as soon as possible because it takes four to six weeks to get that refund. Um you're probably going to be entitled to that. Um the Treasury Secretary has been talking about that at the end of the year that that's uh another thing that they are budgeting for in the Treasury Department. They they expect there to be a lot of refunds. >> It's kind of a form of stimulus. >> It is a kind of form of stimulus. Well, it's a tax incentive and it was a political thing, but the same thing for overtime. If if there are any workers that were working overtime during 2025, um they can now get a new deduction of up to $12,500 um when they file their 25 the 2025 taxes. And by the way, that's $25,000 for a couple file, you know, filing jointly, 12,500 individually. So, um they and and you know, a couple things about that overtime, you know, deduction. It's you don't get to deduct all of your overtime. If a worker work $20 an hour, gets paid $20 an hour and they're they get paid time and a half for overtime. So they got $30 an hour, they only get to deduct the differential between the 20 and the 30, 10 bucks. You know what I mean? So, it's not all of overtime. It's that differential for overtime pay, but it's an additional $125,000 that they can take a deduction for, which they probably did not take that into consideration when they uh were dealing with their estimated taxes. So, those refunds will be due, you know, and coming forward. By the way, Lauren, like if you're an employer, um you really need to be aware of this now. And the reason why is this. the government because of the shutdown didn't make any changes to um your employees W2 forms for this year. So when you do your W2 forms, there's really no special place to put this tipped income or the new calculation for overtime income subject to this, you know, that's eligible for this deduction. So they're leaving it up to the employers who report this to their employees. they're going to change the W2 form next year. But that means that when employees start doing their taxes like in March or April 12th, you know, you know, when whenever they get around to doing it, they're going to want to take advantage of that deduction. They're going to be knocking on your door saying, "Hey, man, what were what was my tipped income last year?" You know, or what is it? What was my eligible overtime wages last year? And you know, as the employer, you need to report that to them. You need to tell them what it is. So, you should be talking to your accountant or your payroll company and make sure you've got those numbers handy. Um, because you're not showing it on the W2. You're gonna, you know, you're gonna be asked about it. Um, next year it'll be on the W2, so you won't have to worry about it as much. Does that Does that make sense? >> Yeah, it sounds like a a little bit of a nightmare. Uh, it is. It's easy to imagine employees missing out on this deduction if they're not aware that they have to go to their employer and figure this out. Or not only that, but if employers calculate the overtime eligibility wages wrong, they're like, "Oh, you got $30 in overtime, then that's what's you're eligible." That the employee uses that number and then they file their tax returns, they get audited, and then it turns out that it was wrong and it's on the employee. You know what I mean? Because it's their tax return. Um or they they get the right number next year and it turns out to be half as much because the calculation was wrong. That could raise red flags. So, it's kind of a mess. So, employers have to be aware of that that's that's going on. By the way, still on the topic of taxes, Lauren, I know I'm going to bore everybody, but there are big tax deductions that you know that that took effect in 2025 for capital equipment and building manufacturing plants and even going back and claiming deductions for your research and development costs. You can now go back to 2022 and do that. So again, a lot of employers, they're going to be, you know, they're going to be getting money back on the tax that they paid in 2025 because a lot of a lot of companies did not adjust their estimated taxes for these deductions. And a lot of them thought that that research and development cost, they thought that deduction went away. You know, I have clients are going to go back and amend their returns to get that money back as well. So again, it's it's it's an incentive. they're they're they're going to have more money in their pockets in uh because of these deductions in 2025 and then going forward they're going to have a lot you know a lot more favorable tax environment to work in to make investments and buy capital equipment. So I think that's good news. >> Let me just ask you before we leave it the the tipped income and the overtime does that make any difference to business owners? I mean, other than the bureaucracy of making sure employees take advantage of this, does it affect the running of the business in any way? Is it a good thing for business owners, a bad thing? >> It's a great question. I think it does, and I'll tell you the reason why. Uh, for, you know, on the overtime side in particular, um, you know, if you're asking your employees to do overtime because you can't find enough employees and, you know, and employees are grumbling. Now, you can say to your employees, "Hey, listen. Um, I know we're asking you to do the overtime, but just just so you know, you know, $125,000 of that now you can take as a deduction next year." So, you're going to get money back on your taxes because of this overtime that you're we're asking you to do. So, that's that's an incentive to do it. It might it might um lessen the pain a little bit for some of those employees. >> That's something. >> Yeah. >> All right. So, you we [clears throat] our conversation is why you're bullish. You've mentioned taxes there. There is also a big tax increase that started this in 2025 and will extend into 2026. Um that you didn't pay a lot of attention to in your piece and I'm wondering how you factor that in. That of course is the the import tax, the tariffs. Um how are you thinking about that? >> I'm not seeing a huge effect on any of my clients. Um I'm not seeing a big effect on uh the manufacturers and distributors that I talked to. Um you know a lot of the big companies that they buy from that are experiencing tariff increases um you know many of those companies have absorbed those costs and are you know and the the price increases to at least my clients uh small and mid-size businesses has been fairly nominal effect so far. the manufacturers you're referring to that are your clients, are they predominantly domestic manufacturers who make stuff here or are they importing stuff that they outsource or >> Yeah, I can use one client like for example like there you know you know the businesses I talked to are pretty they're pretty smart. So there's a lot of businesses of have you know are working around tariff increases. I mean the companies that I know that are suffering the most are the ones that are doing business with um in India or buying from India vendors. It's like a 50% tariff which is a lot but [laughter] you know some of them are buying it is uh they're they're bringing products in to bonded warehouses and holding on to them while negotiations continue and from what I read they are continuing to hopefully reduce those tariffs. Um, in addition, you know, there's you can change around the assembly. So, if you're buying, you know, finished products in India, I have some clients that are actually buying unfinished products partially from India and then from other places and then are finding ways to do assembly of those products here in the US. I had one client in particular in New Jersey um that was going to buy a finished machine you know from an India manufacturer and instead uh bought parts for the machine um you know from various places and the manufacturer is sending over um one of their people to put together the machine for them. So they pay less tariffs on the part and then the person that's coming over is providing services. So that's not tariffed at all. So, it's just an I'm not saying that applies to everybody can do that, but it's just an example of how a lot of companies, you know, they're not dummies. They're they're finding their way around some of those costs, but the tariff themselves, as you know, as Lauren, I'm sure you're reading, um, still have not taken a huge effect. Um, you know, we're still, you know, you know, depending on how things go in 2026 with the Supreme Court rulings, um, we will see what kind of an impact that has on on on tariffs as well. But again, I don't, you know, it's just not something that I'm hearing anymore um panic about from the people that I talk to and people that I interview. >> I have to say I am a little bit surprised. Obviously, we travel in different circles. The manufacturers I talk to uh tend to be uh more concerned about it. I you know, I think you're absolutely right. people have figured out everything they possibly can to try to mitigate the impact and some of it has been successful. Uh some of it was things like buying uh advanced shipments, you know, [snorts] in in anticipation of the tariffs taking effect. Uh obviously the benefits of that uh were have a limited shelf life and and that's probably over for most businesses, especially smaller ones. Um, I think you're right that it hasn't had the impact on the overall economy that a lot of people expected, but it's still a lot of money. I mean, I think the the Chamber of Commerce put out a number. I think they anticipated that uh small businesses would pay something like $200 billion in import uh taxes uh in 2025. It's it's a lot of money. And if you're a small business and you get hit directly, whether it's because you're importing from India or China, uh I mean I know companies like that and it's it's been devastating to some of them. >> Yeah, I'm sure there is. Well, you and I have talked about this in the past. You know, we live in a big country, Lauren. Um there's 33 million small businesses. Um you know, so there are there are plenty of businesses that are not impacted at all by tariffs. Um there are some that are seeing maybe a marginal impact and then there are some of course that are seeing a bigger impact you know so um I just you know I certainly um there are businesses in this country that get impacted by a lot of different factors other than tariffs depending on where their industry is in depending on demand depending on whether you know uh you know a large customer shuts down or moves operations I mean you know there's a lot of things I'm I'm just talking overall um if we're talking about small companies and the companies that I'm dealing with. Um, you know, again, I'm just I I'm not hearing the same, you know, kind of feedback that you're hearing. And in fact, you know, when I go out and I speak to a lot of these groups, I always ask, do you want me to speak about tariffs and some ways to navigate? And I've been, you know, I'm told most frequently, nah, it's just it's turned out not to be a big issue for our group. We, you know, let's talk about something else. >> Interesting. All right. What else is on your list of reasons to uh be bullish about 2026 for small businesses? >> There's certainly less regulations as we know. Uh the Trump administration has rolled back about 600 federal regulations uh since he took office last January. Um specific regulations that impact specific industries, environmental and energy and things like that. I mean again u you know obviously arguable whether or not those are good for the world and good for society and all that stuff. I realize that. Uh but for the businesses operating in those industries, they will have um you know a more free landscape to to you know operate in for better or for worse. And then of course uh regulations coming out of Washington related to the workplace um overtime worker classifications, unions, um all those EEOC rules that you know found employers liable for their employees behavior outside of the office or on Zoom calls. All of that stuff has been iced. Um, a lot of regulations, uh, you know, requiring employers, uh, to have certain DEI policies in their businesses. All of those have been, you know, put aside. So, you know, it just makes it easier because it's less regulations mean less cost. >> Is there anything in particular you would point to that has been most helpful uh to your clients? I I I feel like the regulation conversation often [snorts] is, you know, like like saying 600 regulations have been uh tossed aside doesn't really tell you about the impact. Um some of those probably have real impact, some of them maybe don't. Uh >> sure. >> Can you give an example from your clients of something that's really made a a measurable difference? I'll give you five examples uh on overtime rules. Instead of my clients having to pay more overtime wages because the Biden administration had increased the overtime wage levels for those workers to almost $60,000. Um they've now been rolled back to pre-Biden territory. So now you don't have to pay overtime, you know, if you pay a worker more than 35,000. um on worker classifications for all of my clients that use independent contractors. The Biden administration had issued rules that would have forced many of them to reclassify them as employees. Uh therefore incurring more payroll taxes and making them part of benefit plans and all of that. Those rules were, you know, rolled back as well so they can save on those costs. Um, for those clients that have unions, the National Labor Relations Board under Biden, um, we're giving unions free reign to do marketing and to push through, um, you know, unionization at companies of all sizes, um, without less rules holding them back and much quicker timets. All of that has been turned back as the NLRB um, has changed hands. Um, when it comes to discrimination and harassment, like I mentioned before, uh, the EEOC under the Biden administration issued, um, a number of rules that were going to penalize companies for, um, you know, allowing, uh, their employees behavior, uh, you know, to discriminate or harass both inside and outside of the business. as I mentioned at a bar on a Saturday night or on a Zoom call would have held the lawyer the the employers liable for that behavior. All of those rules have been um held back. And when it comes to DEI uh for many businesses that um did not have uh eligible DEI policies uh they would have been ineligible for certain governmental contracts or government work. uh that those rules have been scaled back which opens up more opportunities for companies that didn't have those policies uh to go after government work and grow their businesses. So um as for example, so there was like five, six, I lost count. >> I did too, but I think you're in the ballpark. >> Okay. [laughter] >> Uh cool. Anything else? Yeah, I mean I think you know this year we're going to be seeing um you know a continuing fall in both interest and inflation which I really um hope that's the case. I can't you know predict that but listen and you know inflation was as high as 9% back in 2021. Um you know now it's it it is below 3%. There's still the wild card as to whether tariffs are going to impact that or not. But the historical rate of inflation over the past 70 years has ranged between 2 and a half to 3%. So, you know, you know, operating at a 3% inflation with less volatility as we're in right now, I think it's a good thing for businesses and they'll be able to make decisions that much, you know, easier. Um, and then borrowing rates have come down. I mean, borrowing rates were at 8 and a half% for the prime rate just a couple years ago. They're down to 6.75% now. hopefully they will continue to head down in that direction and um obviously that will make it easier for businesses to you know to to borrow money for investment you know and I'm keeping a close eye on mortgage rates I mean as inflation you know you know comes under control um and more consistently the bond market reacts and bond yields come down and it's bond yields that drive mortgage rates right now you know mortgage rates are between five and 6% they were um as high as 8% um just a year or two ago Um, so that downward trend is is is potentially I think it's going to hit a tipping point and I think it's going to unleash a huge amount of demand in both the residential and commercial um real estate industry and boy that industry could really use it. Um, they represent between 15 to 18% of the country's GDP and uh they've had their ups and their downs. It's been down for the past few years, but I think, you know, the minute that those mortgage rates really get, I think, below 5% where you've got all those people sitting on low mortgages, it that I I believe that will be the tipping point that will push people into uh really, you know, strongly considering getting back in the market, selling their homes, buying new homes, and then that has a huge indirect impact on all the businesses that are affiliated in that industry. And I think that, you know, this year that could very well happen. So that's another thing. >> Correct me if I'm wrong. I I seem to remember that in the past we've had conversations about interest rates and you suggested that you anticipate they will continue to rise or at least stay high uh in part because of the the big deficits the government has been running. What it sounded like you just said you anticipate them falling. Why why do you think they they're going to fall? Yeah, this is a piece about 2026. So, um you know, I I am still bearish. I am not I am negative on interest rate uh you know, over the next five to seven years um unless we figure a way to pay down our national debt. Um I don't believe that interest rates over the long term um are going to drop that much further than where we are now. So even if the prime rate now is at 6.75% um again it's down from 8 and a half percent um it makes borrowing a lot more palatable. Sure I can never see it getting below 5 to 5 and a half percent and I think at some point it's going to start ticking back up again um as the cost of borrowing increases and interest takes up so much more of our national debt. So I think we're seeing in 2026 we are going to be seeing a bit of a reprieve from interest and inflation but longer term we still have those problems that are hanging out there. >> Why do you see a continued reprieve on on inflation? I'm I'm curious, you know, last year a lot of economists expected the tariffs to just really ignite inflation. It didn't happen. [snorts] uh and and maybe it won't now, but it it's you just look at the tariffs, you would think that would increase prices just based on common sense. You would think, you know, the health insurance changes are that people are experiencing now, that should drive up inflation. Uh the cost of labor, especially with fewer people in the workforce and the immigration crackdown, you'd expect that to drive inflation. Why do you think they're uh that inflation is getting under control? productivity which brings me down to I think our last you know the last point that I see. I think you know this year 2026 um we are finally going to be seeing um a lot more tangible actual adoption of actual tangible AI applications that will enable a lot of businesses to get a lot more done with their existing staff. It's not going to result in them terminating people, but I do think it's going to make them a lot more productive and a lot more efficient. Um, and I think that, you know, the labor numbers will show that, um, as we get further into 2026, and I think it's going to allow a lot of businesses to operate, uh, that much more efficiently. And that way, you know, I I think any price increases, I think you're absolutely right about health insurance. That is, you know, because I, you know, I I I do plan on writing about some of the big challenges that businesses are going to have next year. Um, health insurance is absolutely one of them, and I've got a few others. Um, but that that's going to be an issue. I don't think that tariffs, let's get back to what we talked about earlier. I don't think the tariffs are going to be such a big impact on the vast majority of businesses. I do think some will be, but I don't think it is going to be that kind of a a major impact on businesses. Um I do think that um you know you you because of productivity um because of a tight labor force at the same point um wages themselves will still remain um at the levels that they are now. I mean, wage increases last year were anywhere from three to seven percent. And I do think that we're going to be seeing similar levels as well, which will keep consumer spending um moving along. So, I think all these factors I think are going to actually temper inflation a little bit. I mean, let's not forget when we were really high with inflation. A lot of it was supply chain, you know, stuff that was pushing those price. There was a lot of volatility after COVID and now a lot of that has just come down. Um there is a natural rate of inflation, Lauren, that uh most economies want. You don't want deflation. >> Sure. >> And you don't want very low levels of inflation because that doesn't help wages. >> The Fed's goal has always been 2%, right? >> Yeah. Yeah. That's what the Fed's goal is. I mean, again, historically, it's been between two and a half and 3% again over the last 70 years. having, you know, a consistent rate of inflation of anywhere from, you know, at around 3%, businesses can operate with that pretty well. And I think employees will enjoy wage increases because of that. Um, and I I don't, you know, I don't again, I can't speak for all industries. You know, if you're in the business of selling coffee, you know, maybe, you know, because of tariffs, your coffee costs are coming up. Uh but then again, you know, at the same time, just like we saw with minimum wage in California, you know, when you increase cost in one area, you use technology to bring down costs in other areas. And that gets back to why I do think that uh you know, a lot of developments with AI this year is going to help. I'll give you one example before you know you see you but like I sp just in the past two weeks Lauren I spoke to just four companies four small businesses that are now converting their telephone systems into an AI system right like with a you know an AI receptionist um and they're using some of the bigname players Ring Central and Virtual PBX >> are these retail businesses they're they're doing it to deal with customers or >> no one of them is a design business two of them were construction firms and one is a manufacturer. Okay. And they literally replaced their receptionist. They they people answering the phones. Um either that and and they're also saving time with customer service because a bot answers the phone in a very very friendly and realistic way and is able to handle calls and answer questions before passing on the call to a human or getting the call resolved without passing it on at all. And in all four of those cases, they didn't fire the receptionist, they just put them to use somewhere else in the company, you know. So, they're getting more productivity out of their existing people um for the same level of costs now. And and because of that, it's a perfect example of how I'm I'm I'm seeing how AI is starting to just take hold. And this was at the end of 2025. I think a lot of companies are going to be doing more of this stuff in 2026. I think they'll be getting more out of their people, which means they can get, you know, products out the door and services performed um without increasing prices as much as they need to and still generating the profits that they require. So that's what I'm expecting to see. So it is, you know, the next two years are going to be really interesting with a lot of businesses. >> The four uh companies that you cited, it kind of uh answers the question I was going to ask you, but but but let me ask it anyway. Um, [snorts] you know, so much has been said about kind of the bifurcation of the economy, how both how large companies and smaller companies are taking different paths and having different experiences and I was wondering how you viewed um the the productivity issue through that lens. Do you think it in 2026 it'll have as much impact with smaller companies as it will with larger companies that you know maybe will lay off a lot of people because of AI? >> Yeah. I again it's like every I hate answering it this way Lauren like I it it depends. Yeah. It depends on the company. Um for you know a lot of small I mentioned 33 million small businesses. First of all great many of them are independents and freelancers and contractors and all that. Um, a lot of them are family-owned, old school businesses that just aren't going to adapt as quickly. And then, you know, there's a good chunk that are startups and younger companies run by younger people that are leaning into AI, you know, in a bigger way. You know what I mean? So, it really depends. Um, I will tell you that the larger companies are going to be making, you know, making those changes. >> Larger small businesses or larger companies. >> Larger companies. And I'm already seeing it. I mean, you know, I've always wondered why when I have a conference call uh with a large client and there's, you know, 20 people on a call, I'm like, what the hell are all these people doing? [laughter] You know, you know, my expectation is those calls in the future going to involve less people. >> You're going to be talking to a bot. >> Yeah. Yeah. I mean, I don't know if I'll be talking to a bot yet, but I know that a lot of the AI applications that are coming out, a lot of large companies are building their own internal applications. Um, you're starting to see that in customer service and I'm seeing it in financial services and I'm seeing it also in technology development companies. I mean, you know, companies that that that are software companies can use AI to develop software u, you know, with a third of the staff now because it does that amount of work. Um, AI is being used in customer service applications at large companies already uh to handle calls and um, you know, and route and answer questions. And in financial services, I mean, I wrote about this last year and you know, we're you know, I I really do. We're going to be seeing this year those large financial services firms, banks, investment companies. Why do you need all these wealth adviserss? Why do you need all these investment bankers and investment analysts when you can have one pe person running investment scenarios on thousands of companies using their own internal AI models? All that stuff has been tested over the past two years and it's it's we're going to see a lot more rolled out in 2026 and there you're going to see some jobs being lost. There's there's no question about it. But you know what I maybe I'm just a naive ignorant you know glasses half full guy but those investor bankers that get laid off they're going to start up their own firms. They're going to do their own thing. They'll figure out you know what they're going to do. You know what I mean? And I think that, you know, we'll continue to see a surge in startups that we've continued to see over the past few years, um, and and people creating opportunities, you know, using AI, um, that will employ other people in the future. So, you know, I think it's a I I'm optimistic about that scenario. >> I hope you're right about it. Um, anything you're working on that we should look for? >> Yeah, you know what? I'm gonna speaking of AI, I'm working on a column about AI for Forbes. Uh, it's just an opinion piece about why Microsoft is so screwed up with C-Pilot, why people are so disappointed with Copilot. >> Oh, interesting. >> And, um, I I, you know, my my take is that they're completely missing the boat on what Copilot should be doing. And, um, I think I have an angle on that. So, I'm going to write about that this week. >> Oh, that's that sounds like a topic for a future conversation for us. >> Yeah, it'll be fun. Gene Marks is a CPA who writes weekly on small [music] business for the Guardian, The Hill, the Philadelphia Enquir, The Washington Times, the Chicago Daily Herald, Forbes, and Entrepreneur. You can also hear him on ABC [music] Radio's Eye on the World with John Bachelor. Gene hosts two small business podcasts with Paychecks Corporation and The Hartford while somehow [music] claiming to run a business at the same time [laughter] somehow. >> Not sure how you do that, Jean. Thank you. >> Thank you, Lauren. >> Take care, everybody.