President Trump’s signature tax and budget legislation, commonly known as the One Big Beautiful Bill (OBBB), will significantly change the tax landscape for 2026. Not only are these new tax rules expected to increase the amount of money that individuals receive in their tax this year, pallet and lumber companies will be able to take advantage of a variety of new deductions and incentives.
That’s why 2026 is a turning point. With the OBBB now in full effect, the tax landscape for small and mid-sized wood industry businesses has shifted in ways that matter to real operations—not theoretical ones. Whether you run a high-volume mill, a pallet repair shop with 20 employees, or a hybrid operation doing both new and recycled pallets, you’ll see major changes in how you plan, deduct, invest and hire.
A New Foundation
For the last few years, pallet companies and mills lived under the shadow of the expiring 2017 TCJA provisions. Lower tax rates, larger standard deductions, the 20% Qualified Business Income (QBI) deduction—all were set to expire in 2025.
The OBBB changes that by making many of the 2017 tax provisions permanent and adds new deductions specifically aimed at working families and small businesses.
At the heart of the changes is bigger standard deductions: these rise to $32,200 for married couples filing jointly, $16,100 for single owners and $24,150 for heads of households. For some very small pallet companies, this may mean that itemizing makes less sense unless you live in a high-tax state or have a large mortgage. For those entrepreneurs, the standard deduction is so large that it makes more sense to shift the focus toward business-side deductions instead, which almost always deliver a bigger return.
The 20% QBI deduction—a major tax benefit for S-corps, partnerships, and sole proprietors—is now permanent and more generous. More owners now qualify due to increased income thresholds. Keep in mind that service-business restrictions don’t apply to manufacturing or logistics. Anyone with at least $1,000 of QBI receives a minimum $400 deduction, even if phased out. Most wood businesses are pass-throughs. That means the QBI deduction directly reduces your taxable income—not the company’s, yours. For many operators, this is one of the biggest long-term benefits of the OBBB. This change means that qualified individuals keep the full 20% deduction rather than being phased out.
Deductions and Expensing Rules Are Improved to Make Capital Improvements More Deductible
Few industries benefit more from equipment write-offs than manufacturing companies, including pallet and sawmill operations. From a new piece of equipment to facility improvements to automation that reduces your labor requirements, the new tax laws restore and make permanent 100% bonus depreciation. This means you can deduct the entire cost of qualifying equipment the year it’s placed in service. You no longer have to spread deductions over years. This enables companies to better match tax strategy with operational needs. From a tax perspective, 2026 is a great time to fully deduct all expenses resulting from automation projects or putting new equipment into service.
Also, Section 179 expensing is expanded to provide even more room to deduct equipment expenditures. Section 179 isn’t new, but it’s now far more useful.
Starting in 2026, limits increase to $2.5 million and phase outs begin at $4 million. Why does this matter? Because Section 179 gives you greater control – you can choose which assets to expense and which to depreciate over time. This helps operators smooth taxable income in years with fluctuating lumber costs, major mill upgrades, automation investments, facility expansions, etc.
A common strategy is to use Section 179 for smaller purchases—software, pallet jacks, machinery repairs, safety equipment—and bonus depreciation for bigger investments. Between the two strategies, a pallet company owner can effectively decides his/her own taxable income.
While many pallet companies may think they don’t really do research and development, the IRS definition for this type of expensing is broader than most people realize. Eligible R&D activities in the wood sector may include: improving pallet designs, testing new fasteners or connectors, developing dust-reduction systems, refining sawmill or pallet assembly efficiency, experimenting with new wood species or treatments, and software or process developments.
The OBBB restores immediate expensing of R&D, reversing the unpopular five-year amortization rule. For mills and pallet plants that tinker, innovate, or improve processes—and most do—this is a legitimate deduction that’s often overlooked. If you’ve invested in improving throughput, safety, layout, or automation, you may have qualified R&D expenses without even realizing it.
Overlooked Tax Benefits – Don’t Leave Money on the Table
Labor shortages remain one of the most serious challenges facing pallet and sawmill operations. Anything that helps attract workers matters. And starting in 2026, the employer childcare tax credit jumps from $150,000 to $500,000, and the small business credit increases to 50% of eligible costs, capped at $600,000. This can cover partnerships with local childcare providers, on-site childcare programs, childcare stipends and pre-tax dependent care programs.
Some pallet and lumber companies could use this credit to partner with a local provider, offering discounted childcare to employees. This is a benefit that could significantly improve retention among young parents.
Also, the OBBB introduces several new personal deductions that indirectly help wood-sector employers. Most notably is the no tax on overtime income above the normal rate of pay on an hourly basis. According to the IRS, “Effective for 2025 through 2028, individuals who receive qualified overtime compensation may deduct the pay that exceeds their regular rate of pay – such as the ‘half’ portion of ‘time-and-a-half’ compensation — that is required by the Fair Labor Standards Act (FLSA) and that is reported on a Form W-2, Form 1099, or other specified statement furnished to the individual.”
For this provision, the maximum annual deduction is $12,500 ($25,000 for joint filers). And the deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers). This deduction is available for both itemizing and non-itemizing taxpayers. Given how many pallet shops and mills rely on overtime, this is a major morale boost and a tool for employee retention.
Effective for 2025 through 2028, individuals may deduct interest paid on a loan used to purchase a qualified vehicle, provided the vehicle is purchased for personal use and meets other eligibility criteria. The vehicle must be assembled in the United States, and lease payments do not qualify. The maximum annual deduction is $10,000. Also, deductions phase out for taxpayers with modified adjusted gross income over $100,000 ($200,000 for joint filers). This provision is in addition to general vehicle expensing rules for company vehicles. One thing your company can do is host a tax strategy session for employees using a local tax expert. Information like this can be valuable as you help employees maximize their take-home pay.
And if you happen to live in a high tax state, such as California, New York, New Jersey and Minnesota, the SALT deduction cap was expanded from $10,000 to $40,000. The law increases the $40,000 SALT cap and $500,000 income threshold by 1% each year from 2026 through 2029, with the cap reset to $10,000 from 2030 onwards. OBBB does not change SALT deductibility for either pass-through businesses – such as S corporations and partnerships – or C corporations.
New Rules Require New Strategies
You can’t approach 2026 the way you approached 2024 or 2025. There are too many new levers and opportunities. Many of these changes reward strong financial and tax planning – not just reacting at the last moment.
- Upgrade aging equipment while 100% depreciation is fresh and permanent.
- Reevaluate entity structure for maximum QBI advantage.
- Document process improvements to capture R&D deductions.
- Consider childcare benefits as a recruitment and retention strategy.
- Use Section 179 and bonus depreciation strategically—not interchangeably.
- Review overtime strategies in light of new worker deductions.
- Clean up books so you don’t miss deductible repairs, maintenance, or asset purchases.
The businesses that win in 2026 won’t necessarily be the biggest—they’ll be the ones that are paying attention.
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