Tax Planning Attorney
Pay Less Tax. Legally.

An S corporation election allows business income to be split between wages (subject to self-employment tax of 15.3%) and distributions (not subject to self-employment tax). For example, if your business nets $300,000 and you set reasonable compensation at $150,000, the remaining $150,000 passes through as a distribution, saving approximately $23,000 in self-employment taxes. The key requirements are setting reasonable compensation (the IRS scrutinizes unreasonably low salaries), running proper payroll, and maintaining corporate formalities. The S election is made on Form 2553 and must be filed by March 15 of the first year you want S status. Late elections are possible in some cases under Revenue Procedure 2013-30.

Defined benefit plans and cash balance plans offer the highest deductible contributions, potentially allowing business owners over age 50 to contribute $200,000 or more per year. A solo 401(k) allows up to $69,000 in total contributions for 2024 ($76,500 if over 50), combining employee deferrals and employer profit sharing. SEP IRAs allow contributions up to 25% of compensation or $69,000, whichever is less. The optimal strategy often combines multiple plans. For example, a cash balance plan layered on top of a 401(k) can shelter $250,000 or more in annual income from taxes. Plan design must consider the business's employee population, age demographics, and cash flow.

A 1031 exchange under IRC section 1031 allows you to sell investment or business real property and reinvest the proceeds in like-kind property without recognizing capital gains. The exchange must follow strict rules: you must identify replacement property within 45 days of the sale, close on the replacement within 180 days, use a qualified intermediary to hold the proceeds, and the replacement property must be of equal or greater value. Partial exchanges (where you receive some cash) result in partial recognition. The deferred gain carries over to the replacement property, reducing its tax basis. You can continue deferring through successive exchanges, and at death, the property receives a stepped-up basis, potentially eliminating the deferred gain entirely.

Real estate professional status (REPS) under IRC section 469(c)(7) allows a taxpayer to treat rental real estate activities as non-passive. This means rental losses can offset active income (W-2 wages, business income) without limitation. To qualify, you must spend more than 750 hours during the year in real property trades or businesses in which you materially participate, and more than half of your total working hours must be in real property activities. REPS is particularly valuable for high-income households where one spouse can qualify. Combined with cost segregation and bonus depreciation, REPS can generate six-figure paper losses that offset active income, dramatically reducing the household's tax bill.

The ideal time to start tax planning is at the beginning of the tax year, or before major financial events like selling a business, purchasing real estate, or retiring. However, significant savings are possible even mid-year. Year-end strategies like accelerating deductions, deferring income, making retirement plan contributions, and harvesting tax losses can all be implemented in the fourth quarter. For business owners, entity restructuring should ideally be done at the start of a tax year, but retroactive S elections are possible in many cases. The key insight is that waiting until tax preparation time means most planning opportunities have already passed.