October 27, 2025 | by Atherton & Associates, LLP

High-income business owners face a unique challenge: their personal and business finances are deeply intertwined, and taxes often feel like the single largest expense both personally and for the business. While most people think of tax savings in terms of deductions, business owners have opportunities to spend pre-tax dollars by structuring expenses through their entities.

It’s important to note that some strategies are pure pre-tax opportunities, where dollars never touch taxable income. Others are technically deductions, but when routed through a business structure, they function much like pre-tax spending. The real difference isn’t just classification; it’s timing and intent. Owners who plan ahead can position their spending to capture the maximum tax benefit. Those who wait until year-end to see “what can be written off” are usually too late.

This is a concept referred to as pre-tax arbitrage, and it’s about intentionally structuring your spending to convert what would normally be after-tax personal expenses into pre-tax benefits. When done consistently, this doesn’t just reduce a tax bill in the current year; it reshapes the cost of recurring expenses and compounds savings over time.

Some of the most effective strategies fall squarely within business planning: electing to pay state taxes at the entity level, reimbursing healthcare through a corporation, funding education as a business benefit, or contributing to retirement plans where the dollars are deductible to the company and pre-tax to the participant. Each strategy stands on its own, but together they can create six-figure annual savings for high earners.

PTET: converting state taxes into business deductions

For years, one of the most frustrating limits for high earners has been the federal cap on state and local tax (SALT) deductions. Even business owners with significant state tax liabilities were limited to deducting just $10,000 at the individual level.

The One Big Beautiful Bill Act (OBBBA), enacted in July 2025, raised that cap to $40,000 through 2029. On the surface, that’s good news. But for many high-income business owners, $40,000 still falls well short of actual state tax obligations, and the cap begins phasing out once income passes $500,000. By 2030, the limit reverts back to $10,000.

That’s where the Pass-Through Entity Tax (PTET) election remains a powerful planning tool. PTET allows certain businesses, like partnerships and S corporations, to pay state income taxes at the entity level. Because the payment is made by the business, it’s treated as a fully deductible business expense on the federal return, bypassing the individual SALT cap entirely.

For a high-income partner in a state like California or New York, this election can mean deducting tens or even hundreds of thousands in state tax payments that would otherwise have been nondeductible. Even with the OBBBA’s temporary SALT relief, PTET elections can provide more consistent, higher-value savings, especially for owners whose income exceeds the new phaseout thresholds.

However, PTET election windows, owner eligibility, credit mechanics, and estimated payment timing differ by state. Modeling needs to happen before the election deadline and with full owner-by-owner analysis to avoid cash-flow surprises. The key takeaway is that planning ahead is necessary, but, in doing so, you may be able to shift how state taxes are paid to the tune of considerable savings.

Healthcare through the business

Healthcare is one of the most significant recurring expenses for families, which makes it an obvious target for pre-tax arbitrage. For business owners, entity type determines how much flexibility you have in covering these costs with pre-tax dollars.

• Self-Employed/Partnerships: Health insurance premiums are generally deductible above the line. This helps, but out-of-pocket costs are still typically after-tax.

• C Corporations: C corps offer the broadest planning opportunities. By establishing a Health Reimbursement Arrangement (HRA), the business can reimburse medical expenses for the owner, spouse, and dependents. What would otherwise be a personal cost becomes a deductible business expense.

• S Corporations: Owners holding more than 2% of an S corp face limitations. They can deduct premiums, but cannot receive pre-tax benefits through cafeteria plans or HRAs in the same way as C corp owners. Still, premiums alone are a meaningful deduction.

• Section 125 Cafeteria Plans: For businesses with employees, cafeteria plans allow staff to pay health, dental, vision, and dependent care expenses with pre-tax dollars. The business benefits, too, by reducing payroll taxes.

The point is not just that healthcare costs can be deducted, but that the right business structure determines how far you can push those dollars into the pre-tax category. A C-corp owner with a well-designed HRA could turn $20,000 in family medical expenses into a fully deductible cost of doing business. Yet, these benefits are not plug-and-play. You need the right plan documents, adoption dates, and may need nondiscrimination testing for certain types of benefits.

Education funding as a business benefit

Education is another area where business structures create unique opportunities. Under Section 127 of the Internal Revenue Code, employers can provide up to $5,250 per year in tax-free educational assistance per employee, and the business gets a deduction for the expense. The OBBBA expanded this benefit by making permanent the ability for employers to apply the same $5,250 toward student loan repayments.

A properly documented, nondiscriminatory Section 127 plan can provide up to the annual limit tax-free to employees and certain owners, provided no more than 5% of total benefits go to >5% owners (and their spouses/dependents).

Like the other pre-tax strategies we’ve discussed, a Section 127 plan requires a written program, eligibility terms, nondiscrimination testing, and coordination with other benefits. It must be established before benefits are provided because you can’t “re-label” wages after year-end.

Retirement plans as pre-tax engines

Retirement plans are often discussed as personal savings vehicles, but for business owners, they’re also a way to convert compensation into deductible business spending.

• Defined Contribution Plans: Traditional 401(k)s and profit-sharing plans allow owners to defer income, lowering both personal taxable income and the company’s taxable profit.

• Cash Balance and Defined Benefit Plans: For high-income owners, these advanced plans allow six-figure contributions that are deductible to the business and pre-tax to the participant. They are especially powerful for professional practices or closely held businesses with predictable cash flow.

This creates immediate arbitrage: saving on taxes today, then withdrawing funds years later, often at much lower effective rates. Retirement contributions also integrate with other strategies like Roth conversions in low-income years, or charitable planning through Qualified Charitable Distributions (QCDs).

Putting it all together

Individually, each of these strategies delivers measurable savings. Together, they can transform how a business owner manages both taxes and wealth.

For illustration only, consider a professional services firm organized as an S corporation reporting $1.2 million in annual income. The owners elect PTET, shifting $80,000 of state income tax from nondeductible to deductible at the business level. A defined benefit plan, designed by an actuary, enables approximately $150,000 in owner contributions, deductible to the business and pre-tax for the participants.

In total, these deductions and pre-tax spending reach about $230,000. The actual federal tax reduction equals the marginal rates those dollars span on your return, plus any state-level effects.

This is, of course, a simplified scenario. Every business has unique variables that determine what’s possible. And, many strategies require thorough documentation, compliance, and testing. But the principle holds true: layering pre-tax strategies through the business can reduce taxable income by tens or even hundreds of thousands annually, creating efficiency today and compounding benefits over time.

Making every dollar work harder

These strategies aren’t about cutting back. They’re about structuring your business and personal finances so every dollar works harder. For business owners, that’s where the real advantage lies.

The key is timing. Pre-tax arbitrage doesn’t happen at year-end when the return is filed. It requires proactive design, implemented throughout the year, often in collaboration with your advisor.

If you’re wondering how these opportunities apply to your situation, we invite you to connect with our office. Together, we can identify where your business structure can be leveraged to capture efficiencies, reduce unnecessary tax exposure, and position your wealth for maximum long-term impact.

September 15, 2025 | by Atherton & Associates, LLP

What’s Your Business Really Worth Before You Sell?

If you’re a business owner thinking about selling in the next few years, you might already be asking yourself: What’s my business really worth? It’s a question that’s easier to guess at than to answer—yet getting it right can make a huge difference in your financial future.

Many owners overestimate their business value by relying on revenue multiples or gut instincts. While these quick estimates can be helpful as starting points, they often miss key factors that buyers consider—and that directly affect your sale price. The best way to understand your true business worth? A certified business valuation.

Why Owners Overestimate Value

It’s natural to feel your business is worth more than any outsider might think. After all, you’ve built it, nurtured client relationships, and invested countless hours. But value isn’t just about sales or profits; it’s about risk, market conditions, and how attractive your business appears to buyers.

Relying on rough multiples or informal guesses can lead to unrealistic expectations, causing deals to stall or fall through. Overpricing your business may scare off potential buyers or prolong the sale process, while underpricing means leaving money on the table.

What a Certified Valuation Can Do for You

A certified valuation provides an objective, thorough assessment of your business’s fair market value. It goes well beyond simple revenue calculations by examining multiple factors and applying industry-accepted valuation methods. Here’s what it offers:

1. A Realistic Sale Price Benchmark

You get a defensible, market-based number that reflects what buyers are willing to pay today—not what you hope for.

2. Time to Improve Key Value Drivers

With a clear understanding of your current value, you can focus on areas that boost it, such as improving profit margins, diversifying your customer base, or increasing recurring revenue streams.

3. Insight Into Buyer Perspectives

A valuation highlights your business’s risk profile and potential red flags from a buyer’s viewpoint—helping you address issues before they become deal-breakers.

4. “Clean-Up” Before You List

The valuation process uncovers financial irregularities or adjustments you can make—such as normalizing earnings, removing non-operating assets, or adjusting owner compensation—to present your business in the best light.

5. Use Valuation as an Annual Planning Tool

Starting 2 to 5 years before your planned sale, annual valuations can track your progress, highlight improvements, and refine your exit strategy—ultimately positioning you for a higher sale price and smoother transition.

Planning Ahead Pays Off

Selling a business is one of the most important financial decisions you’ll make. A certified valuation equips you with knowledge and insight to make informed decisions—not based on guesswork but on facts.

Thinking about selling? Start with facts. We can help you understand your value today—and how to increase it before you list.

September 02, 2025 | by Atherton & Associates, LLP

You may think you don’t own a particular business interest, but the IRS might disagree. Under what’s known as the constructive ownership rules, the tax code can attribute ownership to you based on family relationships or the way entities are structured. 

This isn’t just a technical issue for large conglomerates. Attribution rules show up in everyday tax situations, especially for business owners with family ties, legacy trusts, or layered ownership structures. The rules are complex, but the consequences are simple: if constructive ownership applies and you didn’t plan for it, you could lose access to exclusions, deductions, or favorable tax treatment. These rules can also trigger compliance failures or create unexpected tax liabilities, making them very important to understand. 

What are attribution rules?

Attribution rules, also referred to as constructive ownership rules, are designed to look beyond formal ownership to determine who really has control or economic benefit in a business interest. Under these rules, you may be treated as owning stock or partnership interests held by certain family members, trusts, or other entities.

In other words, ownership is not always about what’s on paper. The IRS looks through corporate structures, family trees, and related-party arrangements to decide whether someone is effectively a stakeholder.

The high stakes: why this matters more than you think

Attribution rules affect a range of tax provisions. Some of the most financially significant include:

• Section 1202: Constructive ownership can disqualify shareholders from the QSBS gain exclusion, eliminating up to $15 million in potential gain exclusions per business.
• Section 267: Losses on sales between related parties are denied. If attribution creates a related-party relationship, what appears to be a deductible loss may be permanently disallowed.
• Section 414: Retirement plan coverage and nondiscrimination testing must account for employees of commonly controlled entities. Attribution can bring an otherwise unrelated business into a testing group.
• Section 1361: S-corporation status can be compromised if constructive ownership results in more than 100 shareholders, disqualified shareholders, or multiple classes of stock.
• Section 318: Stock attribution plays a role in corporate redemptions, controlled foreign corporation status, and other international tax provisions.
• M&A due diligence: Transactions can be delayed or derailed when attribution issues are discovered late in the process.

These rules are designed to prevent taxpayers from shifting ownership in ways that appear to comply with the law but don’t reflect the substance of the arrangement.

How attribution works

Attribution rules don’t follow a single template. The definition of “constructive ownership” depends on which section of the tax code you’re dealing with. Each one defines family relationships, ownership thresholds, and even how ownership is traced through multiple entities differently. 

That said, most attribution rules fall into two general categories: family-based and entity-based. 

Family-based attribution

The tax code assumes that family members act in coordination, and it applies attribution accordingly. Specifically, ownership can be attributed between spouses, parents and children, and grandparents and grandchildren. However, not all family relationships are treated the same across the code. For example, siblings are not considered related parties for attribution under Section 318, but they are for Section 267. Cousins, aunts, and uncles are generally excluded, though there are exceptions in certain estate and trust contexts. 

If any of the direct family relationships exist, the IRS may treat your relative’s interest as your own, even if you had no involvement in the business.

Let’s say David owns 100% of MedTech Solutions. For estate planning, he gifts 20% to each of his two adult children and 10% to his spouse. Unfortunately, David still constructively owns 100%:

• Direct ownership: 50%
• Spouse attribution: 10%
• Children attribution: 20% + 20% = 40%
• Total constructive ownership: 100%

As a result, any related-party transactions are still subject to Section 267 (meaning losses are disallowed), and David remains a 100% owner for controlled group purposes.

Entity-based attribution

Attribution can also apply through corporations, partnerships, LLCs, trusts, and estates.

If you own 50% or more of a corporation or partnership, you are treated as owning a proportionate share of the business interests that entity owns. Similarly, if you are a beneficiary of a trust or an estate, your ownership may include a portion of the interests held by that trust or estate.

These rules can move in different directions:

• Upward: Your ownership may be attributed to an entity you control.
• Downward: Interests held by an entity may be attributed back to you.
• Sideways: Interests may shift across family members or related entities, creating control relationships that otherwise wouldn’t exist.

Let’s say Jennifer owns 60% of ABC Corp. Her wholly-owned LLC owns the remaining 40%. This means Jennifer constructively owns 100% of the corporation. If she reduced her LLC ownership below 50%, the attribution would break, potentially changing the tax treatment of corporate transactions. This fluidity creates opportunities for planning, but also risks if these relationships go unrecognized.

The key rules you need to know

A few sections of the Internal Revenue Code apply attribution rules with particular frequency and impact:

Section 267: Disallowed losses

Section 267 prevents you from deducting losses on sales to related parties. Sell stock to your spouse at a loss? No deduction. Your corporation sells property to your 60%-owned subsidiary at a loss? Also disallowed.

Planning point: Time sales transactions carefully and consider the related-party definitions before recognizing losses.

Section 318: Stock attribution for corporate actions

This section defines how ownership is attributed for corporate transactions. It is particularly relevant for C-corporation redemptions, passive foreign investment company (PFIC) determinations, and the classification of controlled foreign corporations. The 50% attribution test often determines whether a redemption qualifies for sale treatment.

Section 414: Retirement plan controlled groups

Section 414 creates controlled group definitions for retirement plan purposes. Companies under common control must be treated as a single employer for coverage testing requirements, contribution limits, and top-heavy testing. A seemingly unrelated family business can suddenly make your company part of a controlled group.

Section 1361: S-Corporation limits

S-corporations face strict eligibility requirements, and attribution can create hidden compliance risks. Constructive ownership may cause an S-corp to exceed the 100-shareholder limit, bring in an ineligible shareholder, or create what appears to be a second class of stock, any of which can invalidate the S-election.

One important exception to be aware of is the family aggregation rule under Section 1361(c)(1). For purposes of the 100-shareholder limit, certain family members can elect to be treated as a single shareholder if specific requirements are met. This election is not automatic. It must be filed with the IRS and properly maintained. Without it, each family member’s ownership is counted separately.

Additionally, if attribution causes ownership to be treated as flowing through an ineligible entity (such as a partnership or nonresident alien), the S-election can be jeopardized even if the shareholder list looks compliant at first glance.

International complications

Attribution rules also affect international tax provisions such as Subpart F (controlled foreign corporation status), Global intangible low-taxed income inclusions (GILTI), and related-party transaction rules for transfer pricing. 

Attribution in practice: common pitfalls

Surprise controlled group

A business owner may assume they’re operating independently, but attribution can tell a different story. Suppose an individual owns 60% of Company A directly. Their spouse owns 15% through an LLC, and their adult child owns 10%, received as a prior gift. When attribution rules under Section 1563 and Section 414 are applied for retirement plan purposes, ownership from the spouse and child may be constructively attributed to the individual.

In this case, the total attributed ownership reaches 85%, crossing the 80% threshold that defines a parent-subsidiary or brother-sister controlled group for qualified plan testing. The result: Company A may now be part of a controlled group, requiring it to aggregate employees and plan coverage with another entity – often one the owner didn’t realize was related under the tax code.

If this attribution is missed, the company’s retirement plan could fail IRS coverage or nondiscrimination testing, leading to disqualification risks, corrective contributions, or costly administrative fixes.

QSBS disqualification during sale

A business owner planning to exclude $8 million of gain under Section 1202 may be blindsided when their spouse’s interest in a related company is attributed back to them. This can trigger affiliated group status and invalidate the exclusion – often too late to adjust.

Retirement plan coverage failures

A company may fail its 401(k) coverage testing when attribution causes employees from the owner’s spouse’s business to be included in the calculation. This often results in costly corrections and, in some cases, the need to retroactively fund additional contributions.

Real estate recapture

When two brothers own separate real estate LLCs and one sells property to the other, attribution can cause the IRS to treat the transaction as occurring between related parties. This may convert what would have been capital gain into ordinary income.

Planning opportunities and risk management

Attribution issues often come down to one thing: awareness. Before executing any major transaction or making structural changes to a business, it’s worth examining how ownership is allocated and how the IRS might view it.

Start by mapping your ownership across individuals and entities, including spouses, children, and any trusts or partnerships. Consider preparing a visual chart to help identify relationships that could trigger attribution. If you’re making gifts or shifting ownership as part of an estate plan, assess how those transfers might shift constructive ownership.

Keep records that document the rationale for ownership structures and how decisions were made. This includes corporate minutes, shareholder ledgers, trust documents, and buy-sell agreements.

In particularly complex or high-dollar scenarios, it may be worth requesting a private letter ruling from the IRS. While expensive and time-consuming, a ruling can provide clarity and help avoid multimillion-dollar mistakes.

And finally, attribution planning works best when coordinated across your advisory team. Your estate planning attorney, ERISA counsel, tax professional, and investment advisor all bring a piece of the puzzle.

When to take a closer look

Attribution rules deserve attention if:

• You own multiple businesses or have family members who do
• Your business is preparing for a sale or corporate reorganization
• You’re implementing or updating a retirement plan
• You’ve made significant gifts or transferred ownership within the family
• You haven’t reviewed your entity structure recently

These rules don’t just apply at the moment of a transaction; they can reach back across years of decisions and across generations of ownership.

Prevention is cheaper than correction

Violating attribution rules, even unintentionally, can cost millions in lost tax benefits, penalties, and restructured transactions. Disqualifying a Section 1202 exclusion, triggering S-corp termination, or failing a retirement plan test all come with real, immediate financial consequences.

While these risks are significant, they are also largely avoidable. Attribution planning, when addressed early, can preserve key tax strategies, support corporate governance, and help ensure compliance with both federal and international rules. In most cases, the cost of reviewing and adjusting your structure is minor compared to the potential exposure.

Keep in mind that each section of the code applies attribution rules differently. No single framework applies across all planning scenarios, which is why context-specific analysis is key. 

If you’d like to evaluate your exposure to constructive ownership, please contact our office for a personalized review. 

This article provides general information and is not a substitute for professional tax or legal advice. Please consult with a qualified advisor for guidance specific to your situation.

July 17, 2025 | by Atherton & Associates, LLP

Financial Benefits of Tax Planning Strategies

July 17, 2025
From the Office of Roberto Galan-Uribe, Senior Tax Associate

Tax planning is a crucial strategy for minimizing tax liability while staying within the boundaries of the law. By strategically managing financial transactions and making informed decisions, individuals and businesses can significantly reduce their tax burden. Here’s a breakdown of the key benefits tax planning offers:

Reduced Tax Liability

• By structuring transactions and income reporting methods efficiently, individuals and businesses can minimize the amount of income that is subject to tax.
• This can be achieved through various legal mechanisms, such as deferring income, maximizing deductions, and taking advantage of tax credits.

Financial Planning Integration

• By factoring in tax considerations, individuals and businesses can make informed decisions that are aligned with their long-term financial objectives.
• Whether it’s saving for retirement, investing in real estate, or planning for education expenses, effective tax planning ensures that each decision optimizes both financial growth and tax efficiency.

Timing of Income and Deductions

• The timing of income recognition and deduction claims can greatly impact the amount of taxes owed.

·        Proper timing of these elements ensures that tax liabilities are minimized, and overall tax efficiency is achieved.

Capital Gains Management

·        Capital gains management is a crucial aspect of tax planning for individuals and businesses who have investments or assets that appreciate in value.

·        By strategically planning when and how to realize capital gains, individuals and businesses can minimize their tax liability and maximize after-tax returns.

Retirement Planning

·       Contributing to retirement accounts, such as 401(k)s or IRAs, offers immediate tax advantages by deferring taxes on contributions or allowing for tax-free withdrawals, depending on the type of plan.

·       These contributions not only help individuals save for retirement but also provide current tax deductions that can lower taxable income in the present.

·       For businesses, offering tax-advantaged retirement plans can be an important part of employee compensation, fostering a secure and tax-efficient retirement future.

Business Structure Optimization

·       For businesses, tax planning involves selecting the most efficient business structure.

·       Each structure has different tax implications, and the right choice can lead to significant savings.

·       Optimizing the business structure to minimize taxes, while also considering operational and legal factors, can enhance a company’s bottom line and long-term success.

Action Item
By strategically managing income, deductions, capital gains, and retirement accounts, individuals and businesses can optimize financial outcomes. Contact your tax advisor to discuss your 2025 tax planning strategy to maximize savings and achieve your financial goals.