What Tax Strategy Actually Means
Tax planning is not a list of deductions. It is a structured approach to the decisions that create taxable income when to recognize it, in what form, inside which legal entity, and how to pair it with deductions, credits, and deferral mechanisms that reduce the obligation before it is fixed. By the time you are reviewing a completed return, virtually every decision that determined that year's tax liability has already been made. The return is the score; planning is the game.
For business owners, the levers are numerous and significant. Entity structure alone the difference between a single-member LLC, an S-Corp, a C-Corp, and a partnership can affect the effective tax rate on business income by 5–15 percentage points. Owner compensation structuring, retirement plan design, real estate depreciation, and the timing of income and deductions are each substantial planning variables. Done well, the combination produces a tax position that is legally optimized, consistently applied, and defensible under audit.
At Montgomery Legal, tax strategy is not a separate engagement from legal advice it is the same engagement. When we help a client form a business, we select the entity with the tax outcome in mind. When we review a contract, we flag provisions with tax consequences before they are signed. When we draft a trust, we structure it with the income and estate tax treatment already designed in. The legal and financial dimensions of every significant decision are addressed by the same person, in the same conversation.
The attorney-CPA advantage in tax planning: A CPA can advise on tax strategy. An attorney can advise on legal structure. An advisor who holds both credentials can tell you that the operating agreement needs a specific provision to achieve a particular tax result and then draft that provision themselves. That combination is genuinely rare, and it eliminates the gap where planning opportunities are lost between the lawyer's office and the accountant's office.
Entity Selection and Structural Tax Planning
The legal structure of a business is also its tax structure. The two cannot be separated, and every choice LLC vs. S-Corp, pass-through vs. C-Corp, single entity vs. multi-entity has tax consequences that compound over time. Most business owners make this decision once, early, without full information. The ones who engage both legal and tax counsel at the outset and revisit the structure as the business grows pay materially less tax over the life of the business.
In a standard LLC or sole proprietorship, the owner pays self-employment tax (15.3% up to the Social Security wage base, 2.9% above it) on all net business income. In an S-Corp, the owner takes a reasonable salary subject to payroll taxes, and draws remaining profits as distributions that are not subject to SE tax. The savings from this structure at the right income level routinely exceed $10,000–$25,000 per year.
The S-Corp election is not universally correct. It adds payroll compliance obligations, requires a reasonable compensation analysis, restricts ownership to 100 shareholders of one class, and eliminates flexibility for certain ownership arrangements. The election is also not free the incremental accounting and compliance cost must be weighed against the SE tax savings. We model both situations before recommending the election.
For clients who currently operate as a single-member LLC and have not evaluated the S-Corp election, this is typically the first and highest-impact planning conversation we have.
- Net business income consistently above $60,000–$80,000
- Owner is active in the business (earning SE-taxable income)
- No plans to bring in foreign investors or multiple share classes
- Willing to maintain payroll and file Form 1120-S annually
- Business is early-stage with variable or low income
- Venture capital or preferred stock is planned
- International owners or complex allocation requirements
Holding Companies, IP Entities, and Operational Separation
As a business grows, a single-entity structure often becomes suboptimal not just legally (for liability reasons) but from a tax perspective. Multi-entity structures can separate operating income from real estate, segregate intellectual property for royalty income treatment, create a management company that charges fees across operating entities, and position the business for a future sale in which only specific assets or entities are acquired.
The tax consequences of a multi-entity structure depend on how the entities are taxed relative to each other whether they share a common ownership structure that permits consolidated returns, whether intercompany transactions are priced at arm's length, and how compensation and income are allocated across entities. Done correctly, multi-entity structures produce significant combined tax savings. Done carelessly, they create intercompany pricing issues and audit exposure.
- Operating company + real estate holding LLC
- IP holding entity for trademarks and proprietary processes
- Management company charging service fees
- Captive insurance arrangements for qualifying businesses
- FLP/FLLC structures for estate planning integration
QBI deduction optimization
The §199A qualified business income deduction allows pass-through business owners to deduct up to 20% of qualified business income effectively reducing the top marginal rate on pass-through income from 37% to 29.6%. But the deduction is subject to complex phase-outs, limitations based on W-2 wages and qualified property, and outright disallowance for specified service trades or businesses (SSTBs) above income thresholds.
Planning around the QBI deduction requires analyzing the business's classification, the owner's taxable income relative to the thresholds, the W-2 wages and qualified property in the business, and the interaction between the deduction and other planning moves including retirement plan contributions that reduce taxable income. We build the QBI analysis into every business owner's annual tax plan.
Owner Compensation Structuring
How a business owner pays themselves is not just a business decision it is a tax decision with consequences that affect self-employment tax, income tax, retirement plan contribution limits, Social Security benefits, and the deductibility of fringe benefits. The optimal compensation structure for an S-Corp owner is different from the optimal structure for an LLC member, and both are different from what is optimal for a C-Corp shareholder-employee.
For S-Corp owners, the IRS requires that owner-employees receive a "reasonable salary" for services rendered to the corporation. Paying too low a salary is the most common S-Corp audit trigger the IRS recharacterizes distributions as wages and assesses back payroll taxes, interest, and penalties. The salary must be defensible by reference to what comparable positions pay in the market.
The right salary is not the minimum the IRS will accept without objection it is the amount that both satisfies the reasonable compensation standard and optimizes the total tax outcome, accounting for payroll taxes, retirement plan contribution limits, and the interaction with the QBI deduction. We prepare reasonable compensation analyses and document the basis for the salary position in each client's file.
Beyond salary and distributions, owner-compensation planning includes structuring fringe benefits health insurance premiums, HSA contributions, accountable plan expense reimbursements, home office deductions, and vehicle use to maximize deductions that are available to employer-paid benefits but not to employees taking them as itemized deductions.
- W-2 salary amount and payroll structure
- Distribution timing and amounts
- Health insurance premium deduction through payroll
- Accountable plan reimbursements for business expenses
- Year-end bonus timing for income shifting
- QBI deduction interaction with salary level
Retirement Plan Design and Contribution Strategy
Retirement plans are the most powerful tax deferral tool available to business owners. Contributions are deductible in the year made, grow tax-deferred inside the plan, and are taxed only when withdrawn ideally in retirement when the owner's income and marginal rate are lower. For a business owner in a 37% marginal bracket, every dollar contributed to a retirement plan saves $0.37 in current federal income tax, plus state tax where applicable.
The plan type determines the maximum contribution, the flexibility of contributions from year to year, the administrative burden, and the obligation to cover employees. Selecting the right plan or the right combination of plans requires understanding all of these variables in the context of the specific business and its workforce.
| Plan Type | 2024 Max Contribution | Flexibility | Employee Coverage | Best For |
|---|---|---|---|---|
| SEP-IRA | $69,000 (25% of W-2) | Flexible vary each year | All employees must receive proportional contribution | Self-employed with no or few employees; simple administration |
| Solo 401(k) | $69,000 + $7,500 catch-up | Flexible elective deferrals + profit sharing | Owner and spouse only (no other employees) | Self-employed sole operators who want maximum contribution flexibility |
| SIMPLE IRA | $16,000 + $3,500 catch-up | Mandatory contribution required | Must match 3% of employee compensation or contribute 2% flat | Small businesses with employees who want simple plan; lower cost |
| 401(k) + Profit Sharing | $69,000 + $7,500 catch-up | Elective deferrals + discretionary profit sharing | Coverage and nondiscrimination testing required | Growing businesses; allows large owner contributions with manageable employee cost |
| Defined Benefit Plan | Up to $275,000+ annually | Actuarially required less flexible | Must cover employees under plan rules | High-income owners 45+ with few employees; highest possible deduction |
| Cash Balance Plan | $100,000–$300,000+ annually | Actuarially determined; more flexible than DB | Must cover employees | Combined with 401(k)/PS plan; maximizes total deductible contribution |
The combination of a 401(k) profit-sharing plan with a cash balance or defined benefit plan is the highest-contribution structure available to owner-operators. A business owner in their 50s with limited employees can often contribute $200,000–$350,000 per year in fully deductible plan contributions deferring that income at the highest marginal rates and building tax-sheltered wealth that will be distributed in lower-income years.
We design retirement plans, coordinate with third-party administrators for plan documents and actuarial valuations, and integrate contribution decisions into the annual tax planning process. Plan design is not a one-time engagement it should be reviewed annually as the business's income and workforce evolve.
How much could a cash balance plan save you?
For a business owner earning $500,000 with three employees, a properly designed cash balance + 401(k) combination can defer $250,000+ annually saving over $90,000 in federal income tax in a single year. Let's model your specific situation.
Capital Gains and Real Estate Tax Planning
Capital gains are taxed differently from ordinary income at rates of 0%, 15%, or 20% for long-term gains, compared to rates as high as 37% for ordinary income. But the rate differential is only part of the planning opportunity. The timing of recognition, the asset's tax basis, the availability of preferential treatment under specific Code sections, and the interaction with the net investment income tax all shape the after-tax outcome on capital transactions.
Real estate is one of the most tax-advantaged asset classes in the Internal Revenue Code but only if the available elections, deductions, and deferral mechanisms are used correctly. Depreciation generates a non-cash deduction that offsets rental income. Cost segregation accelerates that deduction by reclassifying building components to shorter depreciable lives. The §1031 exchange defers capital gains indefinitely when one investment property is exchanged for another of equal or greater value.
A cost segregation study on a $2 million commercial property typically identifies $200,000–$500,000 of components eligible for 5-year or 15-year depreciation rather than the standard 39-year schedule often generating $60,000–$150,000 of additional first-year deductions when combined with bonus depreciation. The study itself costs $5,000–$15,000. The ROI is among the highest of any planning strategy available.
The §1031 exchange requires careful timing and intermediary management. The replacement property must be identified within 45 days and acquired within 180 days. Reverse exchanges, improvement exchanges, and partial exchanges each have different mechanics. We structure 1031 exchanges and coordinate with qualified intermediaries to ensure the statutory requirements are met.
- Cost segregation studies for accelerated depreciation
- Bonus depreciation elections under §168(k)
- §179 expensing for qualifying property
- §1031 like-kind exchange structuring
- Passive activity loss management and grouping elections
- Real estate professional status for PAL limitations
- Opportunity zone investments for capital gain deferral
- §121 primary residence exclusion planning
Investment and portfolio capital gains planning
- Tax-loss harvesting: Realizing losses in a portfolio to offset gains, managing the wash-sale rules, and carrying losses forward to reduce future liability.
- Long-term vs. short-term timing: Holding appreciated assets past one year converts short-term gain (ordinary rates) to long-term gain (preferential rates) a timing discipline worth as much as 20+ percentage points at higher income levels.
- Net investment income tax mitigation: The 3.8% NII surtax applies to investment income for taxpayers above the threshold ($200K single / $250K joint). Passive real estate losses, Roth conversions, and deductible retirement plan contributions all interact with NII exposure.
- Charitable giving of appreciated assets: Contributing low-basis appreciated stock or real estate to a donor-advised fund or CRT avoids capital gains entirely while generating an income tax deduction for the full fair market value.
- Step-up in basis at death: Assets held until death receive a stepped-up basis to fair market value, eliminating all capital gain on lifetime appreciation. For large, low-basis positions, the planning question is whether the estate tax cost of holding outweighs the capital gains tax cost of selling.
Transaction Tax Planning
No single tax planning event produces a higher dollar return on investment than structuring a business transaction correctly before it closes. The difference between a taxable asset sale and a tax-deferred reorganization, between an installment sale and a lump-sum receipt, or between an S-Corp and a C-Corp at the time of sale can represent hundreds of thousands or millions of dollars in tax on a single deal. The planning window closes when the letter of intent is signed.
Asset sale vs. stock sale the structure determines the tax, not just the price
In an asset sale, the seller recognizes gain on each asset class based on its basis ordinary income on inventory and receivables, §1245 recapture on depreciable assets, and capital gain on goodwill and most other intangibles. In a stock sale, the seller typically recognizes capital gain on the difference between the sale price and the stock basis. The after-tax proceeds can differ by $100,000–$500,000 on a $2 million transaction depending on the asset mix and the seller's basis. We model both structures before negotiating deal terms.
Spreading gain recognition across years to reduce the marginal rate and defer the tax
An installment sale under §453 allows the seller to recognize gain as payments are received rather than in the year of sale. This keeps the gain from stacking into the highest brackets in a single year and defers the tax liability sometimes by years. The §453 election is made on the return for the year of sale and cannot be made retroactively. For large transactions, the installment structure must be built into the deal before closing, not added afterward.
How the purchase price is allocated among asset classes determines each party's tax outcome
In an asset sale, buyer and seller must agree on how the total consideration is allocated across the acquired assets and both must report the allocation consistently on Form 8594. The allocation affects the seller's gain character on each asset class and the buyer's depreciable basis going forward. Buyers prefer more consideration allocated to depreciable assets; sellers prefer more to capital gain assets. We negotiate allocation from the seller's perspective and ensure the final agreement produces the most favorable character of gain.
Structural moves made before a sale that permanently affect the tax outcome
For business owners selling to private equity or strategic buyers, pre-sale restructuring entity conversions, §338(h)(10) elections, management equity arrangements, and rollover equity structuring can significantly alter the tax treatment of the transaction. An S-Corp converted to a C-Corp before a sale may qualify for §1202 QSBS exclusion if held long enough. A partnership interest sold vs. an asset sale triggers very different computations. These moves require lead time; they cannot be made the week before closing.
How you buy a business determines your tax basis and depreciation for years afterward
The buyer's tax position in an acquisition is shaped by deal structure: an asset purchase provides a stepped-up basis in acquired assets, which generates higher depreciation deductions going forward. A stock purchase preserves the target's historical basis and may transfer hidden tax liabilities. A §338(h)(10) election on an S-Corp acquisition achieves asset purchase tax treatment in a stock purchase context. We advise buyers on the after-tax value of each structure before the LOI is signed.
Estate and Wealth Transfer Tax Planning
Estate and income tax planning are not separate disciplines they are opposite sides of the same planning decision. Assets held until death avoid income tax on lifetime appreciation through the step-up in basis, but may be subject to estate tax. Assets given away during life avoid estate tax but transfer the donor's basis to the recipient. Every wealth transfer decision involves this trade-off, and the optimal strategy depends on the client's age, health, estate size, the nature of the assets, and the applicable tax rates at any given time.
The Tax Cuts and Jobs Act of 2017 doubled the federal estate and gift tax exemption, bringing it to $13.61 million per individual in 2024. Under current law, this elevated exemption expires after December 31, 2025, reverting to approximately $7 million per individual (inflation-adjusted) unless Congress acts to extend it.
The IRS has confirmed that gifts made under the current higher exemption will not be "clawed back" if the exemption later decreases meaning transfers completed before the sunset lock in the higher exclusion permanently, regardless of the law at the time of the donor's death. For individuals whose estates may be affected by a lower exemption, the strategic opportunity is narrow and closing.
The most commonly used vehicles for this planning include Spousal Lifetime Access Trusts (SLATs), Irrevocable Life Insurance Trusts (ILITs), Grantor Retained Annuity Trusts (GRATs), and outright gifts to trusts. Each has different mechanics, access provisions, and tax treatment. Choosing the right vehicle and implementing it correctly requires both legal drafting and tax analysis.
- SLAT remove assets while retaining indirect access through spouse
- GRAT transfer appreciation above IRS hurdle rate gift-tax-free
- IDGT installment sale move business interest out of estate
- Dynasty trust multigenerational shelter from estate and GST
- Annual exclusion gifting $18,000 per recipient per year, no return
- 529 superfunding five years of exclusion in one lump contribution
Roth conversion strategy
A Roth conversion transfers pre-tax IRA or 401(k) balances to a Roth account, generating taxable income today in exchange for tax-free growth and withdrawals going forward. The conversion makes economic sense when the current marginal rate is lower than the expected future rate which is the case for many business owners in years with lower business income, before Social Security benefits begin, or before required minimum distributions force higher income recognition.
Multi-year Roth conversion laddering converting strategic amounts each year to fill the top of a lower bracket can dramatically reduce lifetime tax on retirement wealth, eliminate RMD obligations, and build a tax-free inheritance. We model the optimal conversion amount each year as part of the annual tax planning process, accounting for Medicare premium surcharges (IRMAA), Social Security taxability thresholds, and the interaction with other income.
Charitable giving as a tax strategy
- Donor-advised fund (DAF) contribution: Contributing appreciated assets to a DAF in a high-income year generates an immediate deduction at the asset's fair market value while avoiding capital gains on the appreciation. Grants from the DAF to charities can be made over multiple years. The deduction is capped at 30% of AGI for appreciated property; excess deductions carry forward five years.
- Qualified Charitable Distribution (QCD): IRA owners age 70½ and older can make direct transfers of up to $105,000 per year from an IRA to a qualifying charity satisfying all or part of the RMD without the transfer being included in taxable income. This is more tax-efficient than taking the RMD and then deducting a charitable contribution.
- Charitable Remainder Trust (CRT): A tax-exempt trust that sells appreciated assets without immediate capital gains, reinvests the proceeds, and pays an income stream to the donor for life or a term of years with the remainder passing to charity. Generates an immediate partial income tax deduction, avoids capital gains on the transferred assets, and removes the asset from the taxable estate.
The Tax Planning Calendar
Effective tax planning is not an annual event it is a year-round discipline with specific windows when each type of planning action must be taken. The calendar below reflects how we structure planning activity across the year for clients with ongoing advisory relationships.
Prior Year Wrap-Up and Foundation
- Finalize prior year retirement plan contributions (SEP, Solo 401k before April 15)
- Prepare and file prior year returns or request extensions
- Review prior year effective rate and identify improvement areas
- Confirm S-Corp election is in place for current year (March 15 deadline for new elections)
- Set estimated tax payment schedule for Q1
Mid-Year Check-In and Income Projection
- Review year-to-date income and project full-year taxable income
- Evaluate whether income will cross planning thresholds (QBI phase-outs, NIIT, IRMAA)
- Identify any planned capital transactions and begin structuring
- File entity returns (S-Corp, partnership) extended from March 15
- Review compensation structure and adjust payroll if needed
Strategic Planning Window
- Refine full-year income projection with actual results through mid-year
- Evaluate Roth conversion opportunities often best executed in lower-income years before year-end income is confirmed
- Review investment portfolio for tax-loss harvesting opportunities
- Begin estate planning moves if using 2025 exemption window
- Assess whether retirement plan design should be modified for current year
Year-End Execution
- Final income projection and year-end tax estimate
- Execute any planned charitable contributions fund DAF, QCD if eligible
- Accelerate or defer income and deductions based on projected rate comparison
- Confirm retirement plan contributions and year-end payroll
- Establish or fund new retirement plan by December 31 for current year deduction (401k), or by tax return due date for SEP
- Complete any estate planning gifting annual exclusion gifts ($18,000/recipient) by December 31
