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In this episode of Wealth Strategy Deep Dives, Dave Wolcott and his guest break down the foundational principles behind proactive tax strategy and why sophisticated investors approach taxes very differently than most people. Instead of treating taxes as a once-a-year event, they explain how the ultra-wealthy build tax planning directly into their business structure, investment decisions, and long-term wealth strategy. From entity structuring and payroll optimization to passive income offsets and asset protection, this conversation highlights why true tax efficiency comes from layering multiple strategies together—not chasing random deductions.
The episode also dives into how partnerships, S corporations, holding companies, and passive activity losses can dramatically impact tax outcomes when structured correctly. Dave explains why aligning your tax strategy with your investment goals is critical and why the tax code is ultimately “a book of incentives” designed to reward certain behaviors and asset classes. Whether you’re a business owner, real estate investor, or high-income professional, this episode provides a valuable framework for thinking more strategically about taxes, wealth preservation, and long-term financial freedom.
This change really in 2026 is we have a reduction now of what are called the excess business loss limitation. So there’s a dollar amount of losses that you can utilize in any one given year. Before we get into the details and all the different pieces and thoughts, I really wanted to, there’s some core principles that we think about whenever we’re going through tax planning, tax strategy, tax advisory.
And I think the first core principle is that you really want to have the tax strategy that aligns with your business and personal investment goals as well. I think there’s… There’s a lot of different things to invest in and you don’t want to invest in things necessarily just for the tax purposes. Mean, I’ve heard the phrase, but you don’t really want to let the tax tail wag the dog. And I think that’s true.
I think you have to have kind of your core philosophy and how you invest in what you do. And then you try to mirror that up with what are the tax benefits and what are the tax strategies around that. Because what you invest in has a direct impact on what your tax situation will be. And I think some of the things we’ll talk about kind of show that.
I think, and you might have heard it’s been said before, but the way you look at the tax code is it’s one, just one big book of incentives is really what the tax code is. And it’s trying to identify what pieces inside of that tax code align with what I’m trying to achieve and then how can we take advantage of those tax opportunities along the way as we go through? I think the other big pieces, I mean, your entity structure, how you, you know, the payroll tax, your exit strategy, all those pieces come into a big part of it, along with the timing.
Timing does matter. I mean, when you pick up income, when do you incur expenses and all those pieces that go into that. And also that, you know, your asset protection strategy, your tax strategy and your estate plan strategy should all sync up together. And we’ll talk a little bit more about different advisors and how all of that comes together too.
And I think, you know, something that David mentioned too, mean, proactive tax planning is really what generates tax savings, right? I mean, the way I often look at a tax return is that the tax return is really just kind of a, it’s a report card that tells how we did on planning throughout the whole entire year. So very rarely should you ever get to your tax return, to tax filing and say, and then you learn how much taxes actually do on that return.
Good proactive tax planning. I you pretty much know what your situation is going into the end of the year. And that tax return is pretty close to what we thought or what we had planned on all the way through the year. So that’s good tax planning.
Think the other piece of good tax planning too, is that it’s rarely is it just one strategy that you use. Many times it’s multiple strategies. And so you’re layering multiple strategies on top of each other in order to be able to achieve whatever, you know, the outcome that you’re looking for. Hopefully that makes sense to everybody. Yeah. Okay. Yeah. Perfect. Good.
Um, so I talked a little bit about entity structure and I think that’s really the first thing to think about because what’s your entity structure looks like matters. Right? I mean, if it’s a C corp, if it’s a Ness corp, if it’s a partnership, all of those have different tax implications that go along with them.
Um, I think, you know, the use of management companies and holding companies and separating out your operating businesses from your long-term asset holding companies is another key piece of it because then that also layers in the asset protection piece, but then also the type of income that you’re picking up during the year too. So try to identify what is your entity structure and what assets fall within that overall entity structure is a really important piece of it too. Uh And then, I mean, as corporation making sure that, I mean, I’ve seen it probably more often than I’d like to, especially on new clients to come in.
If you have an S corporation and you have a really high W2, is that necessary? So thinking about how much W2 compensation should you actually be pulling out of that S corporation is another analysis point too and something to think about. And then also the state tax implications.
And if you have an entity that’s in multiple states and you know looking at the state apportionment associated with that too has a direct impact on the state level because federal taxes is one thing but the state tax is another piece of it to go also so you want to think about that part of it and I think I put it just a couple examples in there too you know I think one structure you often see if you have you know that’s corporate high pass-through income and there’s really not a whole lot we can do to be able to try to offset that and we’re stuck in that 32 % plus tax bracket. I one strategy, one structure, a little bit, I mean, there’s some pieces that go into it, but one structure you could, C corporations have a max tax flat, 21 % tax rate associated with it.
So is there a way to structure the entity so that You know, we’re if we can’t, we’re taking advantage of some of the lower tax brackets and lower tax rates to go into that as well. Just one example. Think the other I’ve seen is probably more applicable to, you know, doctors, lawyers, financial advisors, some of the high income partnership groups that I see.
A lot of times they’re structured as partnerships, which then produces a lot of self-employment tax that goes into that. One structure might be to have the partnership, then everybody’s got their own S corporations associated with that. And so therefore you’re kind of, mitigating a lot of those self-employment pass through taxes that could come through there also.
So those are just a couple of examples of like the structure and the way we think about that structure and why structure matters because the structure has a direct impact on what type of tax is going to be generated and what type of tax at what tax rate it’s going to be generated. If you’ve ever wondered how the wealthy use energy investments to reduce their tax bill while generating cash flow, we just answer to every question on camera. Go to PantheonInvest.com forward slash energy to find out.
A lot of times the clients come in first. The first thing we go through is you put together kind of an entity map and what shows the different entities that you own and the different investments that you hold and think through is this the best way to own and hold those assets, which then kind of parlays into the later discussion around estate planning and all those parts of it too.
I think the other thing, mean, lot of the majority, vast majority are pass-through type entities, right? So partnerships, S corporations. So some of the things you want to think about there, like making sure that we’re taking advantage of the QBI deductions to maximize the amount that could flow through and be in that.
And QBI deduction means if it’s a pass-through entity, there is a deduction of up to 20 % of that income that you could take on your tax return, but you have to make sure that you have the right amount of payroll in there. And so there’s some other pieces that you wanna make sure that you’re taking full advantage of that deduction as it comes through. Ah Reviewing the basis and the at-risk limitations is probably one of the bigger pieces, especially when it comes to non-partnership and S-corporation entities.
There’s many times, probably too many times that I’d like to see is that as you’re taking distributions out of those S corporations, making sure that we’re not taking distributions that are above and beyond what your basis limitations are. Because if you’re taking more cash out than what you have basis for, then that actually creates a taxable event.
So as we’re going through the year, making sure that we’re not pulling too much out of there from a distribution standpoint, because then that can have some adverse tax impacts whenever we get to the end of the year. Making sure that you’re reviewing where your basis at or know where your basis is. And I think the at risk as far as less likely on the real estate partnership side, because it’s really, you get so much basis from the loans that it rarely becomes an issue.
It’s a lot more often on the S corporation side. Ah I think the other piece too, in monitoring the passive activity, passive activity income is one of the greatest income types that you could potentially have, right? Because that passive activity income is very easily offset with other passive activity losses.
And that’s another key piece of the kind of like the initial strategy when talking with people is like understanding what’s your passive income and what’s your active income? What are your passive losses? You know, can we kind of mirror those or marry those two together in a way so that we can more easily offset that active income or passive income because that passive income is easy to offset from real estate syndications and other activities you can get involved in that don’t necessarily take a lot of your time and of your effort. But still could produce a non-cash depreciation loss that you can use against some of your other passive income that’s being generated.
I think the other key piece on this too, and this change really in 2026 is we have a reduction now of what are called the excess business loss limitation. So there’s a dollar amount of losses that you can utilize in any one given year. And so knowing when we’re starting to bump up against that, it’s really good.
I mean, if we can offset all of your income and we can also generate other losses to the offset W2 and some of the other income types that you have, we’re still going to run into an overall limitation. So knowing where we stand with that overall limitation and making sure that we’re not having losses that we can’t use.
Not that those losses go away. A lot of times they get, I mean, all the time, they get carried forward into future years. So you can use them in future years, but you just want to be aware and make sure that we’re not making investments and we’re not necessarily reaping that same benefit in the current year when we’re able to do that.