Tax Planning and Advisory Services
Tax Planning and Advisory Services
This domain tests planning that reduces tax across entities, transactions, and time: entity choice, compensation, retirement, charitable giving, and exit strategies, all constrained by substance and assignment-of-income doctrines.
Core rules
- Compare entity forms: sole proprietor/partnership vs S corp for payroll tax; C corp for fringe benefits and retained earnings; QBI §199A interacts with wages and basis.
- Compensation planning: S corp owner-employee must take reasonable compensation; distributions are not wages. Retirement plans (SEP, solo 401(k), defined benefit) create deductions; contribution limits and nondiscrimination rules apply.
- Timing: defer income, accelerate deductions (subject to economic performance); installment sales; §1031; NOL carryforwards; capital loss limits.
- Charitable planning: DAF, QCD (age 70½), appreciated stock; substantiation rules; estate/gift annual exclusion and basis step-up.
- Exit: §1202 QSBS exclusion; installment sale; §338(h)(10)/§336(e); partnership §754.
- Anti-abuse: business purpose, economic substance, step transaction, assignment of income, related-party §267/§707.
Worked example
Owner has $120,000 net profit as a sole proprietor. As an S corporation, she takes $60,000 reasonable salary and $60,000 distribution. Payroll tax on salary is roughly 15.3% × $60,000 = $9,180; the distribution avoids FICA. As a sole proprietor, SE tax applies to 92.35% of $120,000 = $110,820, roughly 15.3% = $16,955 (the Social Security portion remains under the wage base). The S corp saves payroll tax, but salary must be defensible, payroll and state costs rise, and QBI may fall because W-2 wages reduce QBI. If the salary were $20,000, the IRS could recharacterize distributions and assess payroll tax and penalties.
Traps
Setting salary at zero; ignoring QBI phase-ins; using a step transaction to create basis; overlooking state conformity; forgetting NIIT; applying §1202 without the 5-year holding period; assuming a DAF deduction equals the cash contributed when stock is used.