Tax Strategies That Actually Move the Number

1. Entity choice and the S corporation salary question

The legal form of the business sets the ceiling on everything else. A sole proprietorship or single-member LLC pays self-employment tax on all of the profit. An S corporation pays it only on the salary the owner takes, with the rest coming out as distributions. That split is the single most common savings we implement, and it is also the single most audited, because the IRS requires the salary to be reasonable for the work. The catch in California: the S corporation pays a 1.5 percent franchise tax on net income, with an $800 minimum, so the math has to include the state. The full treatment is on business tax optimization.

2. The pass-through entity tax election

California lets a partnership or S corporation elect to pay state tax at the entity level, which turns a capped personal deduction into an uncapped business deduction. The federal cap on the state and local tax deduction made most Californians’ state income tax nondeductible. The PTET election moves that tax onto the entity, where it is deductible against the owners’ federal income, and gives the owners a matching California credit. The catch: the election has to be made on time and the June prepayment has to be paid, and owners who are trusts or other entities need separate analysis. For a profitable pass-through with California resident owners, this is usually the first thing we check.

3. Retirement plans built for the owner

A cash balance plan can put several hundred thousand dollars a year into a deductible retirement account for an owner in their fifties. A 401(k) with profit sharing caps out in the tens of thousands. A defined benefit or cash balance plan, layered on top, is actuarially designed and can shelter far more, provided the business can fund it for employees too and the owner’s income is steady enough to support the commitment. The catch is the commitment: these plans are multi-year obligations, and they fit businesses with reliable profit, not startups.

4. Qualified small business stock

Section 1202 can exclude up to $10 million of gain, or more, from federal tax when you sell qualified small business stock held more than five years. The requirements are specific: a domestic C corporation, gross assets under the statutory ceiling when the stock was issued, an active business, and original issuance to you. Founders who structure as an LLC and convert later can still qualify, but the clock and the asset test are measured at conversion. The catch: California does not follow section 1202, so the exclusion is federal only, and the corporation has to have been the right kind of company the whole time. Exit structuring lives on exit planning and corporate transactions.

5. Cost segregation and bonus depreciation

A cost segregation study reclassifies parts of a building from 39-year or 27.5-year property into 5-, 7-, and 15-year property, and bonus depreciation lets much of that be deducted in the first year. On a commercial building or a portfolio of rentals, the first-year deduction can be a large fraction of the purchase price. The catch is that the deduction is a timing benefit that reverses on sale through depreciation recapture, and for rental losses to offset other income the owner or spouse usually has to qualify as a real estate professional under the passive activity rules. It is a strategy for people who will hold, or who will exchange rather than sell.

6. The 1031 exchange and the installment sale

A 1031 exchange defers the gain on investment real estate by rolling it into replacement property; an installment sale spreads the gain over the years the payments come in. The exchange has hard deadlines, 45 days to identify and 180 days to close, and requires a qualified intermediary from the start. Touch the money and the exchange is dead. The installment sale works for business sales and real estate alike, and it pairs well with the QSBS analysis on an exit. Both are deferral, not forgiveness, and both need the buyer’s cooperation.

7. Residency and the California exit

Leaving California saves state tax only if the FTB agrees you left, and the FTB does not take your word for it. Residency is decided on the closest connections test: where your home, family, business, doctors, and time actually are. A move done properly, with the documentation built before the sale or the liquidity event, can remove a 13.3 percent state layer from a large gain. A move done on paper, with the house kept and the family still here, produces a residency audit and an assessment. The rules and the FTB’s checklist are on residency and multi-state tax.

8. Charitable structures that are not just donations

A donor-advised fund bunches several years of giving into one deductible year; a charitable remainder trust turns an appreciated asset into an income stream and a deduction without an immediate capital gains bill. Both work for people who were going to give anyway and have a high-income year or an appreciated position. Neither works as a way to keep the money. The IRS audits the valuations, and the deduction depends on the appraisal being right.

What all of these have in common

Timing. Every strategy on this page has to be in place before the transaction it applies to: before the fiscal year for the election, before the sale for the exchange, before the move for residency, before the stock is issued for section 1202. The reason we push clients to have the strategy conversation early is not salesmanship. It is that the same fact pattern is worth six figures in March and worth nothing in December. The other thing they have in common is that each one is an audit issue if it is done sloppily, which is why we document the position at the time we take it.

The firm’s tax strategy practice covers business optimization, exit and transaction planning, individual and high-net-worth planning, residency, real estate, cryptocurrency, and formal opinion letters. Since 2013 we have structured $400M+ in corporate transactions for tax efficiency. The service pages are on tax strategy; fees are on the pricing page, and strategy work is usually a flat fee quoted after a paid strategy session with an attorney.

Frequently asked questions

What is the difference between tax planning and tax preparation?

Preparation reports a year that already happened. Planning changes the next one, by choosing the entity, the timing, and the structure before the income or the gain exists. The savings from planning are usually several times larger, and they are only available before the event.

Which tax strategy saves the most?

For a profitable owner-operated business, the S corporation salary split and the PTET election, together, are usually the largest recurring savings. For a one-time event, section 1202 on a qualifying sale or a residency change before a large gain can be the largest single number. It depends entirely on the facts, which is what the strategy session is for.

Do I need a tax attorney for tax planning, or is my CPA enough?

Your CPA should be in the room. An attorney adds the legal structuring, the privilege, and the written opinion that holds up if the position is audited. Most of our strategy engagements are done alongside the client’s CPA, who then implements on the returns.

Are these strategies legal?

Yes. Every one of them is written into the Internal Revenue Code or the Revenue and Taxation Code. What makes a strategy illegal is doing it on paper only: a salary that is not reasonable, a residency that did not happen, an appraisal that is not real. Substance is the whole rule.

When should I start?

Before the transaction. If a sale, a purchase, a move, or a new entity is in the next 12 months, now. If nothing is planned, a review of the current structure once a year is enough.