Tax planning is the process of arranging your income, business structure, retirement contributions, deductions, and asset sales in advance to legally reduce what you owe. It happens before the tax year closes.
Tax preparation does something different. It reports transactions that already happened and cannot change them.
Almost every strategy below has a deadline. Miss it and the opportunity is gone for that year, no matter how good your accountant is in March. That is the single most important thing to understand about this topic.
- Entity structure: when an LLC should become an S corporation
- Owner compensation: the salary number that controls everything
- Retirement plans: where the largest deductions usually are
- Depreciation: writing off equipment in year one
- Real estate: cost segregation and professional status
- Equity compensation: RSUs, ISOs, and the AMT trap
- The deadlines that decide your tax bill
1. Entity structure: when an LLC should become an S corporation
If you run a business as a sole proprietor or a single-member LLC, all of your profit is subject to self-employment tax. That is 15.3 percent on the first portion of earnings and 2.9 percent above it, on top of income tax.
An S corporation splits your profit into two buckets. Salary, which pays employment tax. And a distribution, which does not.
A consultant nets $200,000. As a sole proprietor, the full amount faces self-employment tax.
As an S corporation paying a $90,000 salary, only that $90,000 is subject to employment tax. The remaining $110,000 is taken as a distribution.
Approximate employment tax saved: $16,000 a year
When does the math start working?
There is no official threshold. As a rough guide, it often starts to pay off once net profit reaches about $60,000 to $80,000. The business also has to be able to support a real salary.
Below that, the added costs usually eat the benefit. An S corporation means payroll processing, a separate tax return, and more bookkeeping.
Watch out: the election has a deadline. To have S corporation treatment apply for the current year, the election generally must be filed by March 15. Miss it and you wait a year.
2. Owner compensation: the salary number that controls everything
Once you have an S corporation, one number drives most of the outcome: what you pay yourself.
Pay yourself too much and you hand over employment tax you did not owe. Pay yourself too little and the IRS can reclassify your distributions as wages. That means back tax and penalties.
The standard is reasonable compensation. In plain terms: what would you have to pay someone else to do your job?
The IRS looks at your duties, your hours, your experience, and what similar roles pay in your area. It also looks at how much of the profit comes from your work rather than your capital. Courts have ruled on this many times. The cases that go badly are almost always the ones where an owner took a tiny salary and a large distribution.
The 20 percent deduction complicates it
Your salary also affects the qualified business income deduction under IRC 199A, which lets many owners deduct up to 20 percent of business income.
For higher earners, the deduction can be limited by how much the business pays in W-2 wages. So a salary that is too low can shrink the deduction. A salary that is too high wastes employment tax. There is a middle range. Finding it takes real math, not a rule of thumb.
3. Retirement plans: where the largest deductions usually are
For most high earners this is the single biggest lever, and the one most often left at the default setting.
| Plan | 2026 limit | Best suited to |
|---|---|---|
| 401(k) employee deferral | $24,500, plus $8,000 catch-up at 50 and over, or $11,250 between ages 60 and 63 | Anyone with earned income |
| Total 401(k), employee plus employer | $72,000 | Owners who can make employer contributions |
| SEP IRA | Up to 25% of compensation, capped at $72,000 | Solo owners wanting simplicity |
| Cash balance plan | Actuarially determined. Often well into six figures for owners in their 50s and 60s | High-profit owners with few employees |
The compensation that can be counted for plan purposes is capped at $360,000 for 2026, which matters when calculating employer contributions.
Why cash balance plans get overlooked
A cash balance plan is a type of pension plan. There is no fixed contribution limit. Instead, an actuary works out the amount from your age, your income, and what the plan promises to pay at retirement.
Older participants have fewer years left to fund that promise. So the allowed contribution rises with age. A 55-year-old owner can often put in far more than a 401(k) alone would allow. The contribution is generally deductible.
These plans work best when the owner earns much more than the staff. They also carry real commitments: yearly actuarial work, required funding, and contributions for eligible staff. They are not right for everyone. But for the right owner, they produce the largest single deduction available.
4. Depreciation: writing off equipment in year one
Normally the cost of business property is deducted over many years. Two rules let you take it much faster, and both changed recently.
| Section 179 | Bonus depreciation | |
|---|---|---|
| 2026 limit | $2,560,000 | 100%, no dollar cap |
| Phase-out | Begins at $4,090,000 of purchases, gone at $6,650,000 | None |
| Income limit | Cannot exceed business taxable income | None. Can create a loss |
| Chosen per asset? | Yes, you elect asset by asset | Applies automatically unless you opt out |
| Heavy SUV cap | $32,000 | Remainder can be taken as bonus |
The One Big Beautiful Bill Act made 100 percent bonus depreciation permanent for qualifying property acquired after January 19, 2025. The phase-down that was scheduled to end it by 2027 is gone.
Most businesses use both: Section 179 first, because you choose which assets it applies to, then bonus depreciation for the rest.
Watch out: a deduction only helps if you were going to buy the thing anyway. Spending $100,000 to save $37,000 in tax is still $63,000 out the door. Timing an already-planned purchase is planning. Buying to create a deduction usually is not.
5. Real estate: cost segregation and professional status
Real estate produces two of the most powerful deductions in the code, and both are commonly missed.
Cost segregation
A building is normally depreciated over 27.5 years for residential rentals or 39 years for commercial property. That is slow.
A cost segregation study breaks the building into parts. Carpeting, cabinets, special wiring, and land work like paving all have much shorter lives. Often 5, 7, or 15 years.
Moving those parts to a shorter life pulls the deductions forward. With 100 percent bonus depreciation available, a large share can land in one year.
Real Estate Professional Status
Rental losses are usually passive. That means they can only offset passive income. They cannot offset your salary or business profit.
Real Estate Professional Status under IRC 469(c)(7) changes that. If you qualify, rental losses become non-passive and can offset other income.
You have to meet two tests. First, more than 750 hours in real property work during the year. Second, more than half of all your working time in those activities. For a married couple, one spouse can qualify and the benefit applies to the joint return.
Watch out: this is heavily audited and the cases usually turn on records. A calendar reconstructed after the fact does not hold up well. Contemporaneous logs do.
6. Equity compensation: RSUs, ISOs, and the AMT trap
If part of your pay comes in stock, the tax treatment depends entirely on which kind you have.
RSUs
Restricted stock units are taxed as ordinary income when they vest, based on the value that day. Most companies withhold at a flat supplemental rate of 22 percent.
If your top rate is 35 or 37 percent, that withholding falls short. The gap shows up as a surprise bill in April. In a heavy vesting year it can be large.
ISOs and the AMT
Incentive stock options can be attractive because a qualifying sale is taxed at long-term capital gains rates rather than ordinary rates.
But if you exercise an ISO and hold the shares, it triggers the alternative minimum tax. You can owe tax on a paper gain in a year you got no cash.
The usual fix is to model how many shares you can exercise before AMT kicks in. Then exercise in measured amounts across several years rather than all at once.
For how the sale itself is taxed, see our guide to capital gains and investment income.
7. The deadlines that decide your tax bill
This is the part that makes planning different from preparation. Most of what follows cannot be done after the fact.
| Deadline | What has to happen |
|---|---|
| March 15 | S corporation election for the current tax year |
| Throughout the year | Owner salary set and payroll run. You cannot backdate wages in December |
| Before a sale closes | Structuring a business or property sale. After closing, the options narrow sharply |
| December 31 | Cash balance plan adopted, equipment placed in service, charitable gifts made, ISO exercises completed, income and expenses timed |
| After year end | A short list only: SEP IRA funding, and in some cases defined benefit funding, up to the extended filing deadline |
The pattern is hard to miss. By the time your return is being prepared in March, almost everything above has closed for that year.
That is why a competent preparer and an unnecessarily large tax bill so often sit side by side. They are different jobs.
Which of these apply to you?
Not all of them will. That is the point.
| If you are | Start with |
|---|---|
| A sole proprietor or LLC owner with growing profit | Entity structure, then retirement plan design |
| An S corporation owner | Reasonable compensation and the 199A interaction, then retirement |
| A practice owner with high profit and few employees | Cash balance plan, then depreciation timing |
| A W-2 executive with equity | RSU withholding, ISO and AMT sequencing, charitable timing |
| A real estate investor | Cost segregation, then whether professional status is achievable |
| Facing a business or property sale | Sale structure and timing, before anything is signed |
The right mix depends on your facts. The wrong mix can cost more than doing nothing. An S corporation election with a badly set salary can backfire. So can a cash balance plan set up without counting staff costs.
Not sure which of these apply to you?
A free strategy call is a straightforward conversation about your situation and whether planning is likely to be worth it. If it is not, we will say so.
Book a Free Strategy CallCommon questions
What is tax planning?
Tax planning is the process of arranging your income, business structure, retirement contributions, deductions, and asset sales in advance to legally reduce the tax you owe. It happens before the tax year closes. Tax preparation reports transactions that already occurred and cannot change them.
When should I switch from an LLC to an S corporation?
There is no fixed threshold, but the math often starts working once net profit reaches roughly $60,000 to $80,000 a year and the business can support paying the owner a reasonable salary. The savings come from employment tax on the portion of profit taken as a distribution. Added payroll and filing costs have to be weighed against that.
What is reasonable compensation for an S corporation owner?
It is the salary an S corporation must pay an owner who works in the business, based on what a similar role would pay at a comparable company. The IRS looks at duties, hours, experience, and market rates. Setting it too low invites reclassification of distributions as wages, with back payroll tax and penalties.
How much can a high earner contribute to retirement in 2026?
The 401(k) employee deferral limit is $24,500, with an $8,000 catch-up at 50 and over, or $11,250 between ages 60 and 63. Total employee and employer contributions are capped at $72,000. A cash balance plan layered on top can allow substantially more, determined actuarially based on age and income.
What is cost segregation?
An engineering study that separates a building into components with shorter depreciation lives, such as fixtures, flooring, and land improvements. Instead of depreciating the whole property over 27.5 or 39 years, those components can be written off over 5, 7, or 15 years, which pulls deductions forward.
What is Real Estate Professional Status?
A tax classification under IRC 469(c)(7) that lets qualifying taxpayers treat rental losses as non-passive, so those losses can offset wages and business income. It requires more than 750 hours in real property trades or businesses and more than half of all working time in those activities, with contemporaneous records to support it.
What is the Section 179 deduction limit for 2026?
$2,560,000, phasing out dollar for dollar once total qualifying purchases exceed $4,090,000 and disappearing entirely at $6,650,000. Separately, 100 percent bonus depreciation is permanent under the One Big Beautiful Bill Act, with no dollar cap and no business income limit.
When is the deadline for most tax planning strategies?
Most must be in place before December 31. Some have earlier deadlines, such as the March 15 S corporation election. A few allow funding after year end, including SEP IRA contributions and in some cases defined benefit plan funding, up to the extended filing deadline.
Sources: IRS Revenue Procedure 2025-32 (2026 inflation-adjusted figures); IRS Notice IR-2025-111 (2026 retirement plan limits); One Big Beautiful Bill Act of 2025 (bonus depreciation and Section 179); IRC 199A, IRC 179, IRC 168(k), IRC 469(c)(7). Figures reflect law in effect as of September 2026 and are subject to change.
This article is general education and does not constitute tax, legal, or investment advice. Reading it does not create a client relationship. Every rule described has exceptions and conditions that depend on your specific facts. Please speak with a qualified tax professional about your own situation before acting.