Entity structure creates tax alpha
The same income flowing through an LLC, an S-corp, or a C-corp carries different tax treatment. Structure is the foundation — everything else builds on it.
Through Reese CPA
How wealthy individuals legally reduce their taxes.
High-net-worth individuals don’t just earn differently — they structure differently. The gap between what they pay and what most high-income earners pay comes from entity structure, income timing, and asset location. Six strategies account for most of it.
The core insight
Wealthy individuals don’t avoid taxes. They structure around them.
There are no loopholes — just the tax code applied deliberately. The six strategies below are available to anyone who earns enough and plans early enough. Most high-income earners use none of them systematically.
Timing is leverage
Recognizing income in a low-tax year, deferring it when rates are high, and accelerating deductions before December 31 can shift the effective rate by 10+ points.
Asset location multiplies returns
Putting tax-inefficient assets in tax-advantaged accounts — and tax-efficient assets in taxable accounts — is free after-tax return. Most investors leave it on the table.
Strategy 1
Income shifting: moving money to where it’s taxed less.
Income shifting is not about hiding income — it is about ensuring that income flows to the right entity or person at the right time. The tax code allows it. Most people don’t use it.
S-corp salary vs. distributions
Setting W-2 compensation at the right level — not too high, not too low — minimizes self-employment tax while staying within IRS reasonable compensation guidelines.
- FICA savings on distributions
- IRS reasonable comp benchmarks
- Payroll coordination
Family employment
Paying family members for legitimate work in the business shifts income to lower brackets. Children under 18 in sole proprietorships may avoid FICA entirely.
- Kiddie tax thresholds
- Legitimate job documentation
- Retirement plan contributions for family employees
Deferred compensation
Structuring when income is recognized — rather than when it is earned — moves taxable events to years with lower marginal rates.
- NQDC plan design
- 409A compliance
- Low-income year targeting
Multi-entity structuring
Operating, holding, and management entities can separate income types, control self-employment exposure, and create legitimate deduction opportunities.
- Management fee arrangements
- IP holding entities
- Cross-entity planning
Strategy 2
Asset location: putting the right assets in the right accounts.
Every investment account is not created equal. Taxable brokerage accounts, traditional IRAs, Roth IRAs, and HSAs all have different tax treatment — and the assets held in each should reflect that.
Placing high-yield bonds, REITs, and actively traded funds in tax-deferred accounts — while holding index funds, qualified dividend stocks, and municipal bonds in taxable accounts — can add meaningful after-tax return with no change in investment strategy.
- Municipal bonds: federal tax-exempt interest in taxable accounts
- Qualified dividends: taxed at capital gains rates, not ordinary income
- Unrealized gains: no tax until realization — hold in taxable accounts
- REITs and bonds: inefficient in taxable; shelter in IRA or 401(k)
Account type comparison
Where you hold an asset matters as much as what you hold.
Taxable brokerage
Index funds, muni bonds, buy-and-hold equities
Low turnover, favorable rates
Traditional IRA / 401(k)
Bonds, REITs, high-yield
Ordinary income deferred until withdrawal
Roth IRA
Highest-growth assets
Tax-free compounding — maximize the opportunity
Strategy 3
Deferral at scale: delay the tax, grow the asset.
Deferral is not avoidance — it is time value of money applied to taxes. Every dollar of tax deferred today compounds at your pre-tax rate of return until recognition. At sufficient scale, the value of deferral alone runs into seven figures.
1031 exchange
Swap like-kind real estate without recognizing gain. Capital gains roll forward indefinitely — or until a step-up in basis at death.
Installment sales
Spread gain recognition across multiple years by receiving payments over time. Useful for keeping income below thresholds.
Opportunity zones
Invest capital gains in qualified opportunity zone funds to defer — and potentially exclude — gain recognition.
NQDC plans
Non-qualified deferred compensation allows executives and highly compensated employees to defer income beyond 401(k) limits.
Defined benefit plans
Owners with high income and no employees can shelter $200K+ per year through cash balance and defined benefit plans.
Qualified retirement accounts
Maxing 401(k), SEP-IRA, and profit-sharing contributions reduces current-year taxable income at the highest marginal rate.
Strategy 4
Charitable giving done right: generosity with tax structure.
Writing a check to charity and deducting it is the least efficient way to give. Wealthy donors use structures that eliminate capital gains, front-load deductions, and in some cases create an income stream alongside the charitable gift.
The difference between an unstructured donation and a structured one can be tens of thousands of dollars in tax savings — with the same or greater impact to the charity.
- Donor-advised fund (DAF)
- Contribute appreciated assets now, take the deduction now, distribute to charities over time. Eliminates capital gains on the contributed asset.
- Charitable remainder trust (CRT)
- Transfer appreciated assets to a trust. The trust sells tax-free, pays you an income stream, and the remainder passes to charity.
- Qualified charitable distribution (QCD)
- IRA owners 70½+ can direct up to $105,000 per year directly to charity — satisfying RMDs without the income ever hitting your return.
Illustrative comparison
Same $100K gift. Very different tax outcomes.
Cash donation
Deduct $100K at ordinary income rate. Capital gains on any appreciated asset sold to fund it.
Appreciated stock via DAF
Deduct $100K fair market value. Zero capital gains. Charity receives full amount.
Illustrative only. Actual tax impact depends on your specific situation. Not tax advice.
Strategy 5
Estate and transfer planning: keeping wealth in the family.
Estate taxes apply above the federal exemption — currently over $13 million per person but scheduled to revert in 2026. Families with significant assets need to act before the window closes. Even below exemption thresholds, transfer planning controls how assets move between generations.
Step-up in basis at death
Assets held until death receive a stepped-up cost basis equal to fair market value. Decades of unrealized gains disappear for income tax purposes. This is the basis of the 'buy, borrow, die' strategy.
Irrevocable trusts
Assets transferred to certain irrevocable trusts are removed from the taxable estate. SLATs, ILITs, and IDGTs serve different purposes — all reduce estate exposure.
GRATs (grantor retained annuity trusts)
Transfer assets expected to appreciate to a GRAT. You receive an annuity back; the excess appreciation passes to heirs gift-tax free.
Family limited partnerships
Consolidate family assets in an FLP or FLC to apply valuation discounts (lack of control, lack of marketability) and shift future appreciation out of the estate.
Strategy 6
Exit and liquidity planning: the highest-stakes tax event of your life.
A business sale is a once-in-a-career event where the tax bill is measured in millions and determined by decisions made years before closing. QSBS exclusion, deal structure, installment elections, and timing around low-income years all matter enormously — and most founders don’t engage a CPA until it’s too late to act.
Planning starts at least 12–24 months before a transaction. The strategies available at that point far exceed what can be done in the six months before close.
- QSBS exclusion: up to $10M of gain tax-free for qualifying C-corp stock held 5+ years
- Asset vs. stock deal structure: buyers prefer asset deals; sellers prefer stock — the tax delta is negotiable
- Installment sales: spread gain over multiple years and tax brackets
- Opportunity zone reinvestment: defer gain by reinvesting in a qualified OZ fund
- Charitable planning: DAF or CRT funded pre-close can eliminate gain on a portion of proceeds
QSBS exclusion
Qualified Small Business Stock can eliminate millions in capital gains.
Section 1202 requirements
- C-corporation at time of issuance
- Gross assets under $50M at issuance
- Stock held for more than 5 years
- Acquired at original issuance (not secondary market)
Potential exclusion
Up to $10M per taxpayer (or 10x basis, whichever is greater) excluded from federal capital gains tax entirely.
Illustrative only. QSBS eligibility depends on specific facts and circumstances. Not tax advice.
The legal boundary
What separates good planning from tax evasion.
Tax avoidance — using legal provisions of the tax code to reduce what you owe — is the entire basis of tax planning. Every strategy on this page is avoidance. It is legal, documented, and available to anyone who qualifies.
Tax evasion — concealing income, falsifying records, or misrepresenting facts to the IRS — is a federal crime. The line between the two is not ambiguous: evasion involves misrepresentation; avoidance involves structure.
Good planning relies on two things: substance and documentation. A transaction must have economic substance beyond the tax benefit, and the paper trail must support the position taken on the return. Aggressive-but-legal positions held without documentation become legally indefensible.
- Legal tax avoidance
- Structuring income through an S-corp to reduce FICA. Timing deductions to high-income years. Gifting appreciated stock to charity via a DAF. All documented, all disclosed.
- Tax evasion (illegal)
- Paying personal expenses through the business without legitimate business purpose. Failing to report income. Overstating deductions with no supporting documentation.
- The documentation standard
- Contemporaneous records — written agreements, board minutes, receipts — are what distinguish a defensible position from an exposed one when the IRS asks questions.
Work with Matt
Ready to build a plan?
Matt Reese, CPA helps business owners structure income, entity elections, and deductions the way high earners actually do — coordinated with their investment plan.
Tax services provided through Reese CPA. This page is educational and does not constitute tax advice.