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Summarized Tax Strategies
Posted Saturday, November 8, 2025
Table Of Contents
Tax Strategies
Key Takeaways
- Build wealth, not just deductions. Tax reduction is a subset of wealth building- not the goal itself. Manufactured tax deductions that trap cash (overfunded 401k plans, depreciating assets, captive investment pools) might save taxes but reduce flexibility. The sweet spot is when a move both builds long-term equity and improves tax efficiency. In short: wealth first, taxes second and keep an eye on your liquidity.
- Cash is king. Illiquidity for the sake of a few tax bucks paints you into a corner. You must always have an exit strategy that aligns with your risk and time horizons.
- Every tax move trades something. Every strategy requires one or more of three ingredients — cash, effort, or risk. Cash leaves your pocket (retirement plans, DAFs), effort means you participate (REPS, STR loophole), and risk means audit or economic exposure (oil & gas, structured equipment leases, captives). Real savings come from balancing those costs against lasting benefits.
- Economic Substance is litmus test #1. Whether it’s leasing equipment, forming a captive, or claiming bonus depreciation, the IRS always asks two questions: Was there profit potential beyond tax savings, and did you actually bear risk? If either answer is “no,” you’re in trouble. Documentation, ownership, and genuine business purpose separate good planning from a reportable transaction. No risk it, no biscuit.
- Material participation is commonly litmus test #2. For most tax strategies, especially the advanced ones, to convert losses from passive to active, you must show real involvement—hours, managerial decisions, and skin in the game.
- If it takes a pitch deck to explain, it’s probably marketing. Solid tax planning usually fits on one page. When you’re staring at 40 slides, arrows, and entities with Latin names, that’s not sophistication, it’s lipstick on a refurb’d reject. Think of a time share seminar. Avoid the illusion of precision or sophistication with fancy marketing. Good ideas don’t take a lot of words to explain.
- Investments are like tattoos. The best tax outcome is the one that still looks good five years later when the tax benefits are gone and the investment remains. A bad investment for a tax deduction remains a bad investment.
- Align tax deductions with unusually high income. Year-end planning isn’t about cramming deductions into December—it’s about matching expenses with the years they matter most. That means bigger deductions belong in higher income years, and lighter years are for delayed tax deduction satisfaction in favor of Roth conversions, harvesting gains, or cleaning up carryforwards. Think marginal rate arbitrage, not tax FOMO or reactive spending.
The following list of tax strategies and considerations is used in our communication and eventual recap email to WCG’s wonderful clients (and prospective clients). If you are not a WCGer, it is totally cool that you stumbled on this webpage full of fun tax content. Use it as you like.
- Contributions reduce taxable income now and grow tax-deferred until retirement- a classic two-for-one of tax savings and wealth building.
- They’re most powerful in high-income years when your marginal rate is higher (and the tax deduction impact is better).
- Employer matches add instant return potential, often 100% on the match portion. Most people will defer at least the employer match amount (free money).
- Overfunding can reduce liquidity for near-term goals, so contribution levels should align with cash flow.
- Pre-tax 401k and IRA accounts must follow required minimum distributions creating a forced tax during retirement.
- Under the SECURE 2.0 Act and starting in the 2026 tax year, participants who earned more than $145,000 (indexed for inflation) in FICA wages from their employer in the prior calendar year must have their catch-up contributions be made as after-tax Roth contributions only.
Source: Reducing Taxes
- Roth 401k is a retirement plan and is not the same as a Roth IRA.
- Like Roth IRAs, Roth 401k’s use after-tax dollars and allow tax-free withdrawals later. Some like to pay taxes now during working years versus retirement.
- Pre-tax contributions reduce income now but create taxable withdrawals in retirement, and are subject to RMDs which leads to forced taxable income.
- Roth 401k plans do not have income limitations / phaseouts and have much higher contribution limits than Roth IRAs.
- The best mix depends on expected future tax rates- some blend both for balance. This is a financial advisor planning question. However, many high earning WCG clients max out Roth 401k plans.
- Roth accounts also do not have a required minimum distribution (unlike traditional IRAs).
Source: Reducing Taxes
- HSAs combine deductible contributions, tax-free growth, and tax-free withdrawals for medical costs. Contributions made through payroll deductions are pre-tax and are not claimed as a tax deduction on your tax return, but they still reduce your taxable income (this is similar to a pre-tax 401k deferral made through payroll).
- They work alongside high-deductible health plans (HDHP) and roll over year to year unlike flex spending accounts (FSAs).
- Funds can be invested similar to a retirement or investment account. Some HSA’s have rules on how you can invest.
- Funds can be withdrawn tax-free for a wide range of qualified medical expenses, including out-of-pocket costs for medical, dental, and vision care, as defined by the IRS.
- After age 65, funds used for non-medical purposes are taxed but not penalized. So, your money is not totally trapped by withdrawal penalties.
- They are considered part of a retirement strategy since you will have medical expenses during retirement and you can either use 401k / IRA money, or HSA money (in other words, you might consider contributing to both your 401k and HSA when considering retirement planning). Health costs are typically a large part of your retirement expenditures- you might as well have it be tax-advantaged.
Source: Reducing Taxes
- Converting from a traditional IRA to a Roth IRA means paying tax now for future tax-free growth. However, you are not penalized on the conversion (just pay income taxes- no early withdrawal penalty).
- This strategy works well if income is temporarily reduced in a particular tax year.
- Once converted, future growth and qualified withdrawals are tax-free.
- Roth accounts also avoid required minimum distributions during your lifetime.
- Poor timing and unnecessarily high amounts can push you into a higher marginal tax bracket. It might also phase you out of other tax credits and incentives. As such, tax modeling is key. Slow, methodical and planned conversions win the race.
Source: Year-End Tax Planning
Aggressive Tax Strategies: High-Risk, High-Scrutiny Deductions
- SEP IRA contributions are based on 20% of business profit on a Schedule C or 25% of wages for S Corp shareholder.
- Solo 401k’s allow both employee and employer contributions for higher limits just like a normal 401k from a typical employer. However, the employer (your business) can contribute the same amount as the SEP IRA calculation above. In other words, a Solo 401k is like a SEP IRA plus employee deferrals. Much larger overall contribution amounts.
- SEP IRAs are simpler but lack Roth options and catch-up contributions.
- SEP IRAs are mostly extinct as a small business retirement plan option in favor of the Solo 401k plan because of a) lower contribution amounts and b) lacking a Roth option.
Source: Reducing Taxes
- These plans let high earners make large deductible contributions beyond 401k limits (upwards to $250,000 at age 55 and $350,000 in W-2 wages for the 2025 tax year).
- Cash balance plans (defined benefit) are usually stacked on top of profit sharing plan and 401k plan (3 plans total). Combining the Cash Balance Plan (Defined Benefit) with a 401k / Profit Sharing Plan (Defined Contribution) allows you to maximize contributions under both sets of IRS rules (benefit and contribution).
- Contributions are based on actuarial formulas tied to retirement benefit targets. The closer you are to age 65, the higher the annual limits.
- They can be used with employees too, but they receive a part of the contribution into their account based on their age (usually around 5% to 7.5% of their compensation).
- Plans require consistent funding and annual administration. There is usually a 3-5 year commitment on making large contributions. Your financial advisor can assist.
Source: Reducing Taxes
- HRAs reimburse employees (including owners, in some setups) for medical expenses tax-free.
- Your business (employers) get a full deduction for medical reimbursements. Paired with a high-deductible health insurance plan, it helps bridge medical costs efficiently.
- The plan must be employer-funded — no salary deferrals allowed. Unlike an HSA or a Flexible Spending Account (FSA), employees cannot contribute any of their own pre-tax salary to an HRA.
- S Corp shareholders (greater than 2% ownership) are ineligible to participate in an HRA on a tax-free basis. However, S Corps can offer HRAs to their non-owner W-2 employees.
- Spouses, children and parents are constructively considered shareholders through attribution rules.
- To maintain the tax-advantaged status, every reimbursement must be supported by third-party documentation (e.g., a receipt) confirming the expense is qualified. Due to the complexity and compliance requirements, using a third-party HRA plan administrator is the industry standard recommendation.
Source: Reducing Taxes
- DAFs let you bundle large amounts of cash or appreciated assets an immediate tax deduction but a measured donation. This is helpful if your donations are otherwise “absorbed” by a standard deduction (versus itemizing).
- Bundling large multi-year donations in a high-income year maximizes itemized deduction value. This is important since several small donations might not be deductible if you cannot itemize your deductions on Schedule A- rather, a DAF is a usually a large amount and therefore “triggers” Schedule A and itemized deductions giving you a one-time tax benefit that you otherwise might not get.
- Contributions of appreciated stock avoid capital gains tax. This is common even outside of a DAF.
- DAFs simplify recurring giving and recordkeeping. They also enjoy not having income or funding limits, and other typical IRS pitfalls.
Source: Year-End Tax Planning
- QCDs allow those age 70½+ to donate directly to charity from their IRA.
- Amounts donated count toward required minimum distributions (RMDs). Effective for those who don’t need full RMD income but want charitable impact.
- Funds are excluded from taxable income — even without itemizing (this one of the reasons QCDs are so attractive). In other words, this tax deduction is considered an “above the line” deduction and direct reduction of adjusted gross income, and as such is outside of typical Schedule A donations.
- QCDs cap at $108,000 annually per taxpayer for the 2025 tax year, Each spouse with an IRA can make a separate QCD up to the annual limit.
Source: Reducing Taxes
- This is a common end of year tax planning strategy where you sell losing investments to offset capital gains to lower overall taxable income.
- Repurchasing the same or substantially identical security (think investment tranche) within 30 days voids the netting of losses with gains. “Substantially identical” is a key, often debated, term (e.g., selling one S&P 500 ETF and immediately buying a different one might be acceptable, but requires caution).
- Often paired with gain harvesting to rebalance portfolios tax-efficiently. Your financial advisor can assist.
- Otherwise, if your total net capital losses (after offsetting all capital gains) exceed your gains, you can deduct up to $3,000 of that net loss against your ordinary income (like wages or interest). Any remaining loss amount beyond the $3,000 limit can be carried forward indefinitely to offset capital gains or the $3,000 ordinary income limit in future tax years.
Source: Year-End Tax Planning
- Borrowing against an investment or security avoids triggering capital gains but gives you access to cash (no different than a line of credit on appreciated real estate).
- These are the three primary mechanisms: Margin Loans (within a brokerage account), Securities-Backed Lines of Credit (SBLOCs) (often larger, more flexible lines for non-purpose loans), and Private Bank Lending (customized, high-net-worth solutions).
- The risk lies in market volatility where falling values can trigger forced sales since your loan limit is pegged to the value of the collateral (which fluctuates). In other words, if your loan to value (LTV) crosses the maintenance threshold, the lender issues a margin call or maintenance call, demanding you either pay down the loan or deposit more cash/securities. The kicker- any forced sale is done at a depressed value of the collateral and also triggers capital gains taxes.
- Interest may be deductible if used for investment or business purposes. Mortgage interest tracing is common (https://wcginc.com/kb-rental-property/mortgage-interest-tracing/)
- Works best for taxpayers needing liquidity without selling, and have large amounts of unrealized capital gains (appreciated values).
Source: Reducing Taxes
- The most common version of this strategy are tax deferrals made by pre-tax 401k and IRA contributions in an income tax state, and then withdrawn once established in an income tax free state.
- Other common deferrals include bonuses (if you have the option), deferred compensation, stock options, business sale proceeds, and installment sale payments.
- Gains from selling publicly traded securities (stocks, bonds, mutual funds) are mostly considered intangible income and are taxed by the state of domicile at the time of the sale, not the state where the investment was held.
- Timing matters: income must be earned or received after establishing residency in the new state — most states tax based on residency at the time the income is recognized, not earned.
- Watch out for “source income” rules: wages, appreciated stock options, business sales, or real estate gains tied to the old state can remain taxable even after moving.
- States like California, New York, and Oregon are aggressive about claiming ongoing nexus or residency ties (183 day test, domicile test); maintaining clean documentation of relocation is essential such as updating voter registration, driver’s license, domicile, and business filings to support the move. Avoiding form over substance is key here. Anyone can change paperwork, but your intent will be scrutinized.
Source: Reducing Taxes
- Pass-through entity tax (PTET) elections let S Corps and partnerships pay state income taxes at the business entity level.
- This creates a federal deduction otherwise limited by the $40,000 state and local tax (SALT) cap. The SALT cap might be reduced to $10,000 if adjusted gross income reaches $600,000 for the 2025 tax year.
- You then receive a state tax credit or adjustment to taxable income on your state income tax return.
- Payments must be timely to avoid underpayment penalties (which can be severe) and missed elections can nullify the benefit (some states do not have a retro or “oopsie” option).
- Each state’s program has unique deadlines and limits. Fortunately, the concept has been approved by the IRS since late 2020, meaning the laws and administrative processes are generally well-established and seasoned.
Source: Year-End Tax Planning and PTET Blog
- You can rent your primary residence to your business for up to 14 days per year, tax-free.
- The business deducts the rent while you excludes the income personally. This delta is the tax play.
- Rent must be reasonable and supported by comparable rates. The IRS will disallow the tax deduction if the rent is found to be excessive, as the transaction is between related parties (which is generally frowned upon). Documentation, such as quotes from local conference rooms, meeting spaces, or comparable short-term event rentals, is crucial.
- Meetings or events must have a legitimate business purpose such as board meetings, strategic planning sessions, company retreats, or client education events.
- Additional documentation is required such as minutes and agenda, and you need a lease agreement and proof of payment (money needs to move as if you were renting from a stranger).
Source: Reducing Taxes
- Your business can rent your short-term rental for legitimate business purposes like retreats, meetings, or training sessions.
- The “self-rental trap” applies — profits are nonpassive, but losses remain passive unless the property qualifies under the short-term rental loophole.
- As such, this is best used when your short-term rental losses are limited by passive activity loss limitations, and you “decrease” your losses when additional rental income that is a rent expense to your business. Keep in mind that self-rental profit cannot be used to offset other passive rental losses. In other words, you can only reduce otherwise non-deductible rental losses on that specific rental property with this tax strategy.
- Similar to the Augusta rule, rent must be reasonable and supported by comparable rates. The IRS will disallow the tax deduction if the rent is found to be excessive, as the transaction is between related parties (which is generally frowned upon). Documentation, such as quotes from local conference rooms, meeting spaces, or comparable short-term event rentals, is crucial.
- Meetings or events must have a legitimate business purpose such as board meetings, strategic planning sessions, company retreats, or client education events.
- Additional documentation is required such as minutes and agenda, and you need a lease agreement and proof of payment (money needs to move as if you were renting from a stranger).
- Your business can rent your personally owned long-term rental as a legitimate second office or work location.
- This allows remote work to have the best of both worlds- work in a desirable location where you would otherwise want a second home to be, yet make it a business tax deduction.
- Rent paid by the business reduces taxable business income, while you report rental income on Schedule E.
- Self-rental rules treat profits as nonpassive but keep losses passive, creating an undesirable mismatch. However, a 1.469-4 grouping election can combine the business and rental into one activity, allowing losses to offset business income.
- Rent must serve an ordinary and necessary business purpose and be paid through real, documented transactions.
- With proper structure, you can deduct mortgage interest, HOA dues, and utilities without second-home limitations, and even accelerate depreciation through cost segregation.
- An accountable plan allows reimbursements to employees or you as the owner for business expenses. Generally not available to a Schedule C business, but rather an S Corp where the owner is also considered an employee.
- The business deducts the payments, and they’re not treated as income to the recipient.
- For simplicity, it is common to handle this during tax return preparation by reclassifying a portion of shareholder distributions as accountable plan reimbursements. Technically, the IRS requires expenses to be substantiated within a “reasonable period” (usually 60 days) and excess amounts returned promptly (usually 120 days). However, this is primarily for a monthly stipend or advances ahead of the expense.
- It still requires substantiation such as receipts and business purpose documentation.
- Mostly used for mixed-use expenses such as mileage, home office, cell phone and internet. Expenses that are 100% business, such as office supplies or travel, should be paid by the business directly.
Source: Reducing Taxes and Accountable Plan webpage.
Aggressive Tax Strategies: High-Risk, High-Scrutiny Deductions
- S Corp salary is generally kept low yet reasonable to reduce the amount of Social Security and Medicare taxes.
- However, should your household taxable income be in the 32% marginal tax bracket or higher, there is a secondary test to the qualified business income deduction (QBID).
- This calculation is 20% of business profit or 50% of wages whichever is lower. This amount is tax deductible.
- As such, if your S Corp shareholder salary is too low, you will limit your QBID deduction. The optimal amount is 28% or more paid out as wages, including staff / employee wages, of pre-wages / salary profits.
- If you are a specific service trade or business (SSTB) such as an attorney, physician and related medical personnel, accountant, financial advisor among other professions, this optimization does not matter due to QBID phaseouts.
Source: Reducing Taxes
- Prepay up to 12 months of ordinary business expenses (rent, insurance, etc.) for a current-year tax deduction.
- Useful in unusually high-income years to level out taxable profit. Doing this when income is stable from year to year will put you “behind the curve” next year.
- Works best for cash-basis taxpayers. Accrual businesses must match expenses to service periods, and this strategy is mostly defeated.
Source: Year-End Tax Planning
- Section 179 allows expensing up to $2.5 million for the 2025 tax year, subject to income limits.
- 100% bonus depreciation applies to new and used qualifying assets, and does not have purchase limits or income limits.
- Section 179 might be more beneficial since many states decouple from the federal tax code and do not allow for bonus depreciation.,
- Depreciation recapture occurs when the asset is sold and is taxed at ordinary tax rates (limited to 25% for Section 1250 property which is real estate). Automobiles are handled differently since they are listed property (should business use reduce to 50% or less, recapture is triggered).
- Section 179 benefit recapture occurs when business use is reduced to 50% or less.
- Both recaptures are mitigated by typical allowed depreciation during the period of use.
- Similar to most tax deductions, Section 179 and bonus depreciation can be the most impactful during unusually high-income years.
Source: Year-End Tax Planning
- Automobiles over 6,000 pounds GVWR (not curb weight) qualify for Section 179 and bonus depreciation deductions up to the purchase amount.
- Luxury automobiles limits cap first-year depreciation for lighter passenger cars.
- Depreciation recapture including Section 179 benefit recapture occurs when the automobile is sold or when business use reduces to 50% or less, and is taxed at ordinary tax rates. Both recaptures are mitigated by typical allowed depreciation during the period of use.
- Recapture can be a trap if you routinely buy and trade-in / sell automobiles since you feel compelled to buy another new automobile to mitigate recapture and related taxes.
- Similar to most tax deductions, Section 179 and bonus depreciation can be the most impactful during unusually high-income years.
- Since automobiles depreciate in value, you should purchase for business need or personal desire, not solely for tax deduction reasons.
Source: Year-End Tax Planning
- Paying a child for legitimate business-related work shifts income to lower tax brackets. The tax benefit is the difference between your marginal tax rate and your children’s tax rate which is often 0% (if amounts paid are equal to or less than the standard deduction).
- Your child can still be your dependent.
- Wages must be reasonable for the services performed, and documentation and time records are essential to withstand scrutiny.
- Children under 18 working for a parent’s sole prop, LLC or partnership may avoid Social Security and Medicare tax.
- Paying your children through an S Corp regardless of age is subject to Social Security and Medicare taxes. Then the tax benefit is the difference between your marginal tax rate and 15.3%. In these cases, a Family Management LLC is usually created where the S Corp pays a fee to the LLC which in turns pays the children.
Source: Reducing Taxes
- Rentals with average guest stays of seven days where you materially participate can qualify as non-passive businesses (the Short-Term Rental Loophole).
- Material participation is usually a) 100 hours and no one did more than you, b) substantially all hours, or c) 500 hours (which is a high bar at nearly 10 hours a week).
- Non-passive losses can offset other income including W-2 income. This is the attraction.
- Bonus depreciation and cost segregation can accelerate tax deductions, and are commonly paired with the STR loophole.
- Your material participation must be documented with a time log that includes hours, decisions, and management activity.
- STRs remain a real business first. As such, the investment must be good on its face (mostly irrespective of the tax benefit). Otherwise it simply becomes a poor decision after the initial tax benefit.
Source: Year-End Tax Planning and Short-Term Rental Blog.
- Cost segregation reclassifies building components into shorter depreciation lives such as 5-, 7- and 15-year classes versus 27.5 and 39 years.
- Requires an engineering-based study to substantiate allocations but many do-it-yourself providers are available (WCG recommends CostSegEz.com).
- Works best when combined with the short-term rental loophole and Section 179 expensing / 100% bonus depreciation.
- This is an accelerated cash flow play since you taking future depreciation already available to you, and compressing a large amount into a single tax year.
- The impact is ideal at higher marginal tax rates such as 22% and above. Deducting a large amount at 12% and 10% marginal tax rates can defeat the accelerated cash flow benefit.
- Retro-cost segregation or look-back cost segregation is available for existing rentals.
Source: Reducing Taxes and Cost Segregation Blog.
- You buy a high-value asset (like a yacht or airplane) and lease it back to a charter operator.
- Depreciation and operating expenses generate large tax deductions, especially under bonus depreciation.
- Losses may be non-passive if you materially participates in management and scheduling. This is the biggest sticking point. Occasional use or limited oversight risks hobby-loss classification under IRC Section 183.
- The IRS heavily scrutinizes yacht/plane businesses due to the high element of personal pleasure, requiring clear evidence of a genuine profit motive and business-like operation.
- “Vacation home rules” apply to yachts since they are considered a dwelling unit. As such, you cannot personally use the yacht more than 14 days a year or 10% of the fair rented days (whichever is higher). Personal use of an airplane leased back to an operator gets tricky.
- Even if you are active with a profit motive, Excess Business Loss (EBL) limits cap current-year deductions ($313,000 single / $626,000 married for the 2025 tax year).
- Degradation in value with yachts will alter the internal rate of return on the cash flows. Airplanes typically have better retention value.
Source: Advanced Tax Strategies
- You purchase solar or renewable energy equipment (e.g., photovoltaic panels) and claim the Investment Tax Credit (ITC) under IRC 48.
- You may lease the equipment to another business or utility (a “lease-in, lease-out” or “sale-leaseback” structure) while retaining ownership.
- Under the Inflation Reduction Act of 2022, the ITC is generally 30% of eligible basis for qualifying energy property placed in service through 2032. For larger projects, this 30% rate is contingent on meeting prevailing wage and apprenticeship requirements; otherwise, the base credit is 6%. The credit is scheduled to begin phasing out after 2032, with the rate dropping to 26% in 2033 and 22% in 2034.
- You must be the owner for tax purposes and the equipment must be placed in service by you to claim the ITC. IRC 50(b)(4) and Regulations 1.48-4 disallow credits in certain disqualified leasebacks (e.g., where the lessee is the original seller or a related party).
- Credits are subject to recapture if the equipment is sold, disposed of, or ceases qualifying use within five years. As such, and with most advanced tax strategies, exit plans must be considered and the risk mitigated. The question is how do you successfully sell or otherwise dispose of equipment that is likely installed / fixed to real estate? This can be tricky.
- Investors purchase equipment with cash or financing, and lease to an operator(s).
- Tax deductions stem from bonus depreciation and Section 179 expensing including interest expenses.
- If you lack operational control or risk, losses are passive. Your money must be at-risk for this to work.
- Guaranteed lessees or guaranteed buybacks undermine economic substance. Again, your money (and your business) must have typical business risk. Courts have denied deductions for “lease-in/lease-out” or “sale-leaseback” schemes with no genuine business risk (AWG Leasing Trust v. United States is a good example).
- The IRS also focuses on the profit motive beyond tax savings. In other words, you must run this like any other business in a bona fide manner.
- There is also the financial risk of being stuck with equipment that you cannot sell or easily continue leasing. In other words, exiting this tax strategy can be difficult.
Source: Advanced Tax Strategies
- Syndicate investors may be able to claim depreciation and losses passed through from large multifamily or commercial projects.
- To deduct these losses against W-2 or business income, you must qualify as a Real Estate Professional (REPS), elect to group under 1.469-9(g) and materially participate in the grouping. This is the biggest challenge.
- Some promoters oversell the idea that a REPS declaration alone allows for losses to be deductible. You must qualify for REPS- 750 hours in real estate activities, more than 50% of your time in all activities including W-2 jobs and business ownership is in real estate, and you must materially participate in the underlying activities.
- IRS scrutiny increases when CPAs certify dozens of identical REPS filings. This is cross-referenced between a tax preparer or firm’s PTIN and the EIN of the syndicate.
- The final concern in addition to the material participation hurdle is how to get out the investment. Redemption clauses can create long and undesirable horizons (inflexibility and basic illiquidity).
Source: Advanced Tax Strategies
- Investors can deduct Intangible Drilling Costs (IDCs) immediately which are often 70–85% of total well cost. This is the tax play.
- Under IRC §469(c)(3), a direct working interest (without limited liability) is treated as non-passive. This is a special carve out in the tax code, which is nice.
- This can offset active income including W-2 income and business income without passing the typical material participation tests (500 hours, 100 hours and no one did more than you, and substantially all hours- in these investments, only 500 hours would otherwise be available since you’d fail at the other two).
- The trade-off: unlimited liability for environmental, legal, and operating risks. This is real risk.
- Using an LLC, LP, or other liability shield generally voids the non-passive treatment, reverting losses to passive.
- The final risk is exiting the investment. Oil and gas are historically volatile and can “dry up” quite literally. Unlike most advanced tax plays, material participation isn’t the hurdle here- the liability and economics are.
Source: Advanced Tax Strategies
- Partnerships buy land, obtain inflated appraisals, and donate “development rights” to claim large charitable deductions.
- The tax deduction equals the alleged drop in property value- often several times the investment. The math is simple- you buy into the partnership for $75,000 and they send you a K-1 reporting a $300,000 (for example) charitable donation.
- IRS challenges target overvalued appraisals and lack of bona fide conservation purpose. They can easily track this with the EIN of the entity (partnership) reporting these K-1s.
- Courts have consistently disallowed syndicated easements marketed for tax profit rather than preservation. What’s worse is that syndicated versions are now treated as listed transactions requiring disclosure under Regulations 1.6011-4.
- Unlike other advanced tax strategies that require economic risk and material participation, conservation easements have a large audit risk of being an abusive tax shelter.
Source: Advanced Tax Strategies
- You purchase to hold hard-to-value private assets or investments such as limited partnership interests, private company shares, or promissory notes with your IRA. Following the transaction, the asset or investment is valued at an amount much lower than the original investment / purchase.
- After obtaining a discounted valuation (typically for lack of marketability or control),you convert the IRA to a Roth IRA at the lower appraised value, minimizing the conversion tax (since the account value is now considerably less).
- When (if) the underlying investment appreciates later, all future growth occurs tax-free inside the Roth.
- The IRS might deem the discount or valuation as artificial. Works only when discounts are justified by true lack of marketability or control. Aggressive appraisals have drawn scrutiny after Summa Holdings and Peek v. Commissioner. This case underscores scrutiny of self-dealing and valuation abuse within IRA structures.
- You can’t undo a bad investment. As with some other advanced tax strategies like structured equipment leasing and working interest in oil and gas, exiting strategy must be top of mind. If the redemption or exit hurdles have a penalty or a long waiting period, this can reduce the overall investment rate of return including the initial tax benefits.
Source: Advanced Tax Strategies
- You form your own insurance company called a “captives” to insure real operational business risks. Premiums paid are deductible to your business while the captive may qualify for favorable small-insurer treatment under IRC 831(b)- paying tax only on investment income, not on premiums.
- The tax advantage comes from the captive’s ability to later distribute excess reserves or surplus as long-term capital gains to you (its owner).
- Said differently, the tax play is the difference between your marginal tax rate and your long-term capital gains rate. For example, deduct at 37%, invest smartly, risk no longer exists or excess cash is built up, distribute at 23.8% (assuming net investment income tax).
- Problems arise when “insured risks” are trivial or premiums lack actuarial support. IRS victories (Avrahami, Caylor Land, Reserve Mechanical) show that fake or circular risk pools fail the substance test.
- A well-designed captive requires independent underwriting, claim history, meaningful risk distribution and economic substance. This can be a massive challenge in most small businesses, especially those like consulting and disguised W-2 (where you have a single client who pays you as a contractor).
- Best suited for larger businesses with uncovered or high-deductible risks that typical insurance cannot or choose not to cover.
- The IRS views these as listed transactions. Designating a transaction as a “listed transaction” means you are generally required to disclose your participation on your tax returns using Form 8886.
Source: Advanced Tax Strategies
- DST promoters claim you can sell appreciated property including your business, defer gain, and reinvest through a trust.
- As such, you sell an appreciated asset (such as real estate or a business) to a third-party trust before the sale to a final buyer.
- They are often structured as an installment sale which spreads out your tax “hit” and usually at lower blended or effective capital gains rates (since each year, your capital gains rate resets and is calculated based on that year alone).
- In other words, your sale to the trust is an installment sale, but the sale to the ultimate buyer might or might not an installment sale. This can essentially take cash from the ultimate sale that would otherwise be immediately taxable in full, but spread it out to you over time as the seller.
- However, the “trust” can be viewed as a related party or alter ego. As such, if the transaction lacks economic substance or involves a “related person” (as defined by tax law), the tax deferral can be disallowed, and the gain may be immediately taxable. Monetized installment sales have a similar problem.
- If you still control the money or bear no real risk, the gain is immediately taxable. This is a common theme among advanced tax strategies- you must bear risk.
- DSTs can work with arm’s-length buyers and properly structured notes with an experienced attorney.
Source: Advanced Tax Strategies
- MIS structures combine a long-term installment sale with an immediate loan against the sales note.
- You get cash up front but claim the gain is deferred. This is similar to borrowing against your appreciated investment in Tesla or some other security, but the risk is much higher.
- However, the IRS (Chief Counsel Memo 202118016) rejects this logic- the loan proceeds are taxable sales proceeds. The key argument is that the “loan” is not a genuine debt because it is often unsecured and non-recourse, meaning the seller has no real obligation to repay it; thus, the cash received is considered an immediate payment of the sales proceeds, making the gain immediately taxable. The key is risk (as with many advanced tax strategies).
- The economic substance doctrine (codified in IRC §7701(o)) says a transaction must a) change your economic position in a meaningful way, and b) have a substantial non-tax purpose. When a deal involves intermediaries, back-to-back loans, or circular cash, it usually fails both tests.
- The IRS views these as listed transactions. Designating a transaction as a “listed transaction” means you are generally required to disclose your participation on your tax returns using Form 8886.
Source: Advanced Tax Strategies
- CRTs let you donate appreciated assets, defer gain, and receive income for life. The trust, that is usually created by you and a competent attorney, sells the asset tax-free and reinvests proceeds for income payouts.
- You then get an upfront charitable deduction for the remainder value passing to charity.
- You receive an immediate tax deduction in the year the trust is funded. This deduction is not for the full value of the asset, but for the present actuarial value of the remainder interest that is expected to pass to the charity at the end of the trust term.
- The tax play often involves balancing the current tax deduction and future income against the amount ultimately committed to charity. Calculating the exact values can be complex and dependent on various factors, including current interest rates and the beneficiaries’ life expectancies, leading to potentially narrow margins. In other words, very tricky and the amounts must be high enough to move your needle.
- However, abuse occurs when payout rates are inflated or remainder interests are negligible. The IRS has strict rules to prevent abuse. For instance, the trust’s payout rate must be between 5% and 50%, and the actuarial value of the charitable remainder interest must be at least 10% of the initial fair market value of the assets put into the trust (like your business prior to sale).
- Using an experienced, competent attorney and obtaining proper, independent valuations is essential to ensure compliance and avoid IRS penalties.
Source: Advanced Tax Strategies
Economic Substance
Economic Substance Doctrine summarized-
- Every transaction must have a substantial non-tax purpose and meaningful economic effect.
- The economic substance doctrine was codified in IRC §7701(o) in 2010. The rule includes an objective test (meaningful change in economic position) and a subjective test (substantial non-tax purpose).
- Applies across all aggressive strategies — from leasing schemes to syndicated easements.
- A transaction must alter your economic position in a meaningful way. If a transaction involves no real risk, business purpose, or capital commitment outside of tax benefits, it will likely fail the economic substance test
- Documentation should demonstrate decision rationale, not just tax outcome.
- The IRS focuses on your intent and whether the transaction had a substantial non-tax purpose. A lack of a credible, non-tax reason for the transaction is often fatal to your position.
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