The Federal Reserve recently lowered its benchmark rate by 0.25%, setting the federal funds target range to 4.00%–4.25%.
While the headlines mostly focus on mortgage rates and Wall Street, this rate cut also opens the door to strategic tax planning opportunities — especially for S Corporation owners and small businesses preparing for year-end.
At RCC, we focus on helping business owners stay compliant with IRS rules while optimizing tax savings. Here’s how this rate change may affect your planning in the months ahead.
1. Leverage Lower Borrowing Costs
When rates drop, so does the cost of borrowing.
This is a great time to:
- Refinance business loans or lines of credit to improve cash flow.
- Use that additional cash to fund retirement contributions, pay down high-interest debt, or invest in growth opportunities that may offer tax benefits.
- Consider timing big-ticket purchases like equipment before year-end to pair financing savings with Section 179 or bonus depreciation deductions.
2. Optimize Your Interest Deduction Strategy
As interest rates decline, your deductible business interest expense may also decrease, which could lower the related tax deduction.
Work with your tax advisor to:
- Review how much interest you’re deducting.
- Adjust for any changes that could affect your overall tax position heading into 2026.
3. Plan for Capital Gains Taxes
A lower interest rate environment often pushes markets higher. While that can be good for investments, it can also mean larger capital gains taxes come tax time.
Consider strategies such as:
- Tax-loss harvesting to offset gains.
- Making charitable contributions of appreciated stock to reduce taxable income.
- Moving funds into tax-advantaged accounts to shield future growth.
4. Review Officer Compensation & Payroll
For S Corporations, officer compensation must be reasonable and well-documented to stay compliant with IRS guidelines.
Lower rates could affect:
- Cash flow decisions, like how much salary vs. distribution to take.
- Planning for payroll tax obligations and timing year-end bonuses.
- Making sure your officer compensation report is updated and audit-ready.
Tip: RCC provides detailed PDF reports that support your compensation calculations, giving you peace of mind if the IRS ever asks for documentation.
5. Update Your Q4 Estimated Taxes
With potential changes in:
- Interest income
- Investment gains
- Business profits
…it’s crucial to update your Q4 estimated tax payments.
This helps you:
- Avoid underpayment penalties.
- Stay compliant with both federal and state tax requirements.
- Head into 2026 without surprise tax bills.
The Mortgage Rate Myth
Many people assume that a Fed rate cut means mortgage rates automatically drop — but that’s not how it works.
- Mortgage rates are based on long-term bonds and global markets, not just the Fed’s short-term rate.
- By the time the Fed announces a cut, the market has often already adjusted.
- Sometimes, mortgage rates even move in the opposite direction.
Bottom line: Make decisions based on accurate, current data — not assumptions.
Take Action Before Year-End
The Fed’s recent move is more than just economic news — it’s a signal to review your financial plan and tax strategy.
Here’s what to do now:
- Run a fresh officer compensation analysis to ensure compliance.
- Review debt and cash flow for refinancing opportunities and tax-smart allocation.
- Plan ahead for capital gains taxes and estimated payments.
- Schedule a year-end tax strategy session with your CPA.
At RCC, our mission is to help business owners navigate complex IRS rules confidently and accurately.
Start by making sure your reasonable compensation calculations are compliant and audit-ready.
Generate Your Officer Compensation Report Today
Bottom line:
The Fed’s rate cut may seem like a small change, but for S Corp owners and small businesses, it can influence borrowing costs, tax deductions, and planning strategies. Act now to protect your business and maximize tax savings before year-end.
