A Raleigh software development C-Corp had never elected QSBS treatment or properly structured its 199A deduction. Five strategies later, $32K annual saving and a 0% federal exit documented.
01The Situation
The founder had grown his software agency to $3.2M in revenue. The business was profitable. But tax planning had been reactive. Three things had never been addressed: the Section 199A deduction had been incorrectly assessed (the agency qualified but the owner's income was below the phase-out threshold), QSBS documentation had never been completed, and retirement contributions were significantly below the maximum allowed.
02What We Did
The Section 199A deduction added $64,000 in deductions. The owner salary was revised from $180K to a more defensible $140K, reducing payroll taxes. Bonus timing was restructured to year-end. Retirement contributions were maximized through a combined SEP-IRA and defined benefit plan.
QSBS documentation was completed retroactively to the founding date. If the company is sold, the founder's first $10M in gain will be exempt from federal capital gains tax, potentially transformational at exit.
03Client Impact
The QSBS documentation was the most asymmetric strategy: it took one afternoon to complete and costs nothing until exit, but it could exempt $10M of gain from federal tax. The founder had not thought about exit planning yet. After this engagement, he does.
Breakdown
| Tax Strategy | Before | After | Annual Saving | Notes |
|---|---|---|---|---|
| Section 199A Deduction | $0 | $64,000 deduction | $14,080 | Properly structured |
| QSBS Documentation | Not done | Documented | $0 now / future gain | 0% federal on exit up to $10M |
| Owner Salary Optimization | $180,000 | $140,000 | $8,840 | Revised reasonable comp |
| Bonus Timing Strategy | Ad hoc | Year-end structured | $6,240 | Deferred to lower-rate year |
| Retirement Contributions | $22,500 | $66,000 | $9,630 | SEP + defined benefit |
| TOTAL | — | — | $32,040/yr | All strategies combined |
What changed
Section 199A Implemented, $14K Annual Saving
$64K deduction properly applied. Owner income below phase-out threshold.
QSBS Documented, 0% Federal on Future Exit
Retroactive to founding. First $10M of gain exempt from federal capital gains. Zero cost to document now.
Retirement Contributions Maximized, $9.6K Saving
SEP-IRA + defined benefit. $66K total contribution vs $22.5K prior.
$32K Annual Tax Saving Achieved
All five strategies implemented. Effective rate: 31.2% → 22.6%.
The QSBS documentation was the most asymmetric strategy: it took one afternoon to complete and costs nothing until exit, but it could exempt $10M of gain from federal tax. The founder had not thought about exit planning yet. After this engagement, he does.
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