Tax Strategy & Minimization
Legal strategies to reduce business and personal tax burden — entity optimization, deferred compensation, retirement planning, California-specific tactics.
Tools & Resources
Key Terms to Understand
Asset Sale
A transaction where the buyer purchases specific assets (equipment, inventory, contracts, IP, goodwill) rather than the entity itself. The seller keeps the legal entity and its liabilities. Buyers prefer asset sales for liability protection and tax benefits (stepped-up basis). Sellers often prefer stock sales to avoid double taxation.
Stock Sale (Equity Sale)
A transaction where the buyer purchases the ownership interests (stock or membership units) of the entity itself. The buyer inherits all assets AND all liabilities. Sellers prefer stock sales because proceeds are typically taxed as capital gains. Buyers bear more risk.
Personal Goodwill
Goodwill attributable to the individual owner rather than the business entity — their personal relationships, reputation, and skills. Critical in both business sales (can be structured as a separate payment taxed as capital gains) and divorce (personal goodwill is NOT community property in California).
S-Corp Election
An IRS tax election (Form 2553) allowing a corporation or LLC to pass income through to owners' personal returns, avoiding corporate-level tax. The key benefit: owners who are also employees can split income between salary (subject to FICA) and distributions (not subject to FICA), saving 15.3% on the distribution portion. The #1 tax-saving structure for profitable small businesses.
Reasonable Compensation
The salary an S-Corp owner-employee must pay themselves before taking tax-advantaged distributions. Must be comparable to what the role would pay on the open market. Set it too low and the IRS reclassifies distributions as salary (plus penalties). Set it too high and you lose the tax benefit. Getting this number right is the core of S-Corp tax planning.
Qualified Business Income (QBI) Deduction (Section 199A)
A 20% deduction on qualified business income from pass-through entities (S-Corps, LLCs, partnerships, sole props). Phases out for specified service trades at $191K single / $383K joint (2024). Complex rules, but for eligible businesses, it effectively reduces the top federal rate on business income from 37% to 29.6%.
Stepped-Up Basis
When assets are inherited at death, their tax basis resets to fair market value at the date of death, eliminating all built-in capital gains. Critical for succession planning: transferring a business at death can be more tax-efficient than gifting during life. Also relevant in asset sales where buyers get a stepped-up basis on purchased assets.
Gift Tax & Annual Exclusion
Federal tax on transfers of property for less than full value. Annual exclusion: $18K per recipient (2024). Lifetime exemption: $13.61M (2024), but scheduled to drop to ~$7M in 2026. For family business transfers, annual gifting of ownership interests is a core strategy — but valuation discounts and timing matter enormously.
Estate Tax
Federal tax on the transfer of a deceased person's estate. Current exemption: $13.61M per person (2024). The exemption is scheduled to be cut roughly in half in 2026, making estate planning urgent for business owners with estates over $7M. California has no state estate tax, but the federal rate is 40% above the exemption.
Valuation Discount (DLOM / DLOC)
Reductions applied to the fair market value of a business interest to reflect lack of marketability (DLOM, typically 15–35%) and lack of control (DLOC, typically 15–25%). Used in gift and estate tax planning to transfer more value within exemption limits. Discounts on minority interests in family businesses are a powerful succession planning tool but face increasing IRS scrutiny.
Limited Liability Company (LLC)
A flexible business entity that provides liability protection without the formality of a corporation. Can be taxed as a sole proprietorship, partnership, S-Corp, or C-Corp. Default taxation is pass-through. In California, LLCs pay an $800 minimum franchise tax plus a gross receipts fee ($900–$11,790) that catches many owners off guard.
C-Corporation
A business entity taxed separately from its owners at the corporate rate (21% federal). Profits are taxed at the corporate level, then again when distributed as dividends (double taxation). Despite this, C-Corps are standard for venture-backed companies (investors require it) and businesses planning IPO or seeking QSBS exclusion.
Qualified Small Business Stock (QSBS) Exclusion
Section 1202 allows exclusion of up to $10M (or 10x basis) in capital gains on the sale of qualified small business stock held for 5+ years. The business must be a C-Corp with under $50M in gross assets. One of the most powerful tax benefits available to founders and early employees of tech companies.
California Franchise Tax
California's annual tax on the privilege of doing business in the state. Every entity (LLC, S-Corp, C-Corp) pays a minimum of $800 per year — regardless of profit or activity — for as long as it exists. S-Corps owe an additional 1.5% of net income (minimum $800). C-Corps owe 8.84% of net income. LLCs also owe a separate gross receipts fee ($900–$11,790) on top of the $800 minimum. The franchise tax is the single most expensive 'cost of existing' for California entities.
Proposition 13 (California Property Tax)
California's 1978 constitutional amendment capping property tax at 1% of assessed value with annual increases limited to 2%. Properties owned for decades may be assessed at a fraction of fair market value, creating enormous embedded tax savings. The catch: 'change in ownership' triggers reassessment to current market value. For businesses, transferring real estate to a new entity, selling a corporation that owns real estate, or transferring partnership interests above 50% can all trigger reassessment — potentially increasing property taxes 5-20x overnight.
Capital Gains Tax
Federal tax on profit from the sale of a capital asset (stock, real estate, business interest). Long-term rate (held over 1 year): 0%, 15%, or 20% based on income, plus 3.8% Net Investment Income Tax for high earners. Short-term rate: ordinary income rates up to 37%. California adds an additional 1-13.3% — California does NOT have a preferential capital gains rate, taxing it as ordinary income. The combined federal + California rate on long-term capital gains for high earners reaches 37.1%.
FICA (Self-Employment Tax)
Federal Insurance Contributions Act tax — Social Security (6.2%) plus Medicare (1.45%) — paid on wages by both employee and employer (total 15.3%). Self-employed individuals (sole props, single-member LLCs, partnerships) pay both halves themselves as self-employment tax. Social Security portion caps at $168,600 (2024); Medicare has no cap but adds 0.9% on income above $200K single / $250K joint. Avoiding FICA on the distribution portion of income is the #1 reason high-earning service businesses elect S-Corp status.
Dealing with tax strategy? Let's talk.
Dennis Duitch has guided hundreds of business owners through tax strategy situations across technology, entertainment, manufacturing, and professional services.
MBA, Northwestern University · CPA · Certified Business Appraiser · Mediator · 30+ years of practice