August is the quiet before the storm — and the best time to put the year's biggest levers on the table while there is still runway to act. This issue covers three that reward early planning: oil & gas for the high-W-2 client with almost nowhere else to turn, advanced retirement plan design for the profitable owner, and the first installment of a series on the §469 grouping election, one of the most under-used tools in the code.
From the Editor — Ross Brannon
The Best Planning Happens Before the Year Closes — Not After
By the time a client's return crosses your desk in the spring, the most valuable decisions have already been made — or missed. That is the arithmetic of tax planning: the moves that change the number have to be in place before December 31, or before a transaction closes. A return is a record of what already happened; August is when there is still time to change what it will say.
The three strategies in this issue share that trait — each rewards the client who acts early and quietly penalizes the one who waits. A working interest in oil and gas is one of the only deductions that reaches a client's W-2 income, but only if it is in place before the year ends. A cash balance plan can shelter well into six figures for a profitable owner, but it has to be established and funded on a schedule. And a grouping election is the linchpin of a strategy that can change the math entirely for the right client — one that works even when the two businesses are completely unrelated, because “related” was never the test. Some CPAs make the mistake of looking at grouping at the surface and not digging deeper (because they have never had to). That is why it earns a four-part series, starting this month.
None of these is a form you file in April. They are decisions you help a client make in the back half of the year, while there is still room to act — and that is the line between preparing a return and advising a client. It is also the difference your best clients remember.
If a client comes to mind as you read, that is the signal to start the conversation now, while the window is open.
Have a client who should be planning before year-end? The window closes with the calendar.
1. The High-W-2 Client With Few Options — Oil & Gas Working Interests
One of the only deductions that reaches W-2 income
Think about the client with a large W-2 and almost nothing to work with. Nearly every meaningful mitigation strategy is built for business owners or investors — entity structuring, depreciation, passive-loss planning — and none of it reaches wage income. A direct working interest in oil and gas is one of the very few investments whose deductions land squarely against a salary. Under §263(c), a working-interest owner can elect to expense intangible drilling costs — the labor, fuel, site prep, and other non-salvageable costs of drilling a well — in the year they are incurred. Because those costs typically run around 70 percent of a well's cost and are allocated to investors first, a general-partner interest often produces a first-year deduction of roughly 70 to 90 percent of the amount invested.
The reason it reaches wage income at all is §469(c)(3), which carves working interests out of the passive activity rules — but only where the taxpayer holds the interest directly, or through an entity that does not limit their liability. Held as a general partner, the loss is active: it offsets W-2 wages, business income, and other ordinary income, with no material-participation requirement. Invest instead through an LLC, S corporation, or limited-partner interest — anything that shields liability — and that advantage disappears: the loss turns passive, gets suspended, and does nothing for the wage earner it was meant to help. For a high earner, the practical effect is a deduction large enough to move taxable income down a bracket or two — and, where it applies, back under the §199A phaseout. That one structural choice is the difference between a deduction the client can use this year and one that sits idle.
The benefits do not stop at year one. Once wells produce, the depletion allowance shelters roughly 15 percent of gross production income, and percentage depletion can continue even after the client's cost basis reaches zero. For a general partner, the drilling deductions can also reduce self-employment income — a further benefit for the business-owner client. A couple of structural points matter: the investment is illiquid, and general-partner status carries unlimited liability during the drilling phase, typically converting to limited-partner status once the wells are complete. This fits the client with meaningful ordinary income to shelter who is comfortable holding a direct, longer-term energy position.
Practitioner Note — AMT & State Conformity
Two things to check before a client invests. Excess IDCs are an AMT preference item under §57(a)(2), though the independent-producer exception spares many investors — as a rough planning gauge, IDCs up to roughly 43 percent of ordinary income generally raise no preference. And state conformity varies: most states follow the federal IDC deduction, but California requires 60-month amortization and Pennsylvania 120-month, so a client in a non-conforming state sees a very different state result.
2. The Owner Who Thinks They’ve Maxed Out — Stacked Retirement Plans
When the “maximum” isn’t the maximum
Plenty of successful owners believe they have already maxed out. They make the full profit-sharing contribution — capped near $70,000 — and are told that is the ceiling. For a solo S-corporation owner with strong W-2 income and no employees, it rarely is. The move is to stack plans rather than pick one: a 401(k) for elective deferrals, a profit-sharing plan for employer contributions, and a defined benefit or cash balance plan layered on top for the large actuarial deduction. Combined, a high-earning owner in their fifties can push total deductible contributions past $300,000 in a single year — several times what any standalone plan allows.
The reason it works is the absence of employees. With only the owner in the plan, there is no nondiscrimination testing, no top-heavy issue, and no coverage requirement diluting the owner’s share — nearly all of the contribution flows to the person writing the check. The S-corporation structure reinforces it, cleanly separating W-2 wages (plan-eligible) from K-1 distributions (not), which supports a reasonable salary large enough to fund the stack. And because the defined benefit piece is actuarial, the deduction accelerates with age: fewer years to fund the target benefit means a larger annual number, not a smaller one.
This is design work, not a form you download — it has to be modeled against the owner’s age, compensation, and goals, and it carries real setup and administration costs — but for the right owner it produces one of the largest deductions available anywhere in the code.
The test that decides whether a loss actually counts
Before a client ever reaches a grouping election, everything turns on a single question §469 asks of each activity: does the client materially participate? Answer yes, and that activity's income and loss are non-passive — a loss can offset wages, business income, portfolio income, whatever else is on the return. Answer no, and the loss is passive: it cannot offset active income and sits suspended on Form 8582 until the activity produces passive income or the client disposes of it entirely. That one determination is where most of the money is won or lost — and it comes down to seven tests, where meeting any single one is enough.
The Seven Tests — Any One Suffices
1
More than 500 hours in the activity during the year.
2
The client's participation is substantially all the participation by anyone in the activity.
3
More than 100 hours, and no one else participates more than the client.
4
Several “significant participation” activities (100+ hours each) that together exceed 500 hours.
5
Material participation in the activity for any 5 of the prior 10 years.
6
A personal-service activity in which the client materially participated for any 3 prior years.
7
Facts and circumstances — regular, continuous, and substantial involvement (subject to regulatory limits).
Most clients clear the line on their main business and fail it on the side venture — the one throwing off early losses they would most like to use now. When a standalone activity can't pass on its own, the grouping election lets a client combine activities into a single “appropriate economic unit” and measure participation across the whole. That is where Part 2 picks up — including the part most practitioners miss: the activities do not have to be related to be grouped. Part 2 works through the factors that define an “appropriate economic unit,” the disclosure statement, and the consistency rules that make a grouping stick.
Practitioner Note — Proving the Hours
Material participation is a facts question and the burden sits with the taxpayer. Hours can be shown by any reasonable means, but after-the-fact estimates tend to lose — contemporaneous calendars, logs, and appointment records are what hold up. Build the habit of documenting hours in the year they are spent, not the spring after.
Hosted by Matthew Foreman — a tax attorney and co-chair of Falcon Rappaport & Berkman's tax practice — each biweekly episode takes one thorny topic and works through the statute, the caselaw, and what it means in practice, usually in 20 to 30 minutes. Recent episodes span the Kwong case, QBI, and UBTI — consistently a notch above the basics, which is what makes it genuinely useful for practitioners rather than beginners.
Pick the one that fits — a high-W-2 client with no deductions left, an owner who has outgrown their plan, a client with activities that should be grouped. A short call is usually enough to know whether it is worth pursuing. No pitch, no obligation.
This communication is provided for educational and informational purposes only and does not constitute legal, tax, accounting, or investment advice. The strategies discussed are general in nature and may not apply to specific individual circumstances. Any examples are hypothetical illustrations and are not a guarantee of any particular result. Tax laws are complex and subject to change; readers should consult qualified tax and legal professionals before acting on any strategy discussed.
Matt Chancey, Ross Brannon, Johnny Borrelli and Jacob Harvey are Registered Representatives of Crescent Securities Group, Inc. (“CSG”), Member FINRA/SIPC and an Investment Advisory Representative of Crescent Advisor Group, Inc. (“CAG”), an SEC Registered Investment Advisor. Neither CSG or CAG are affiliated with Tax Alpha Companies, Including Tax Alpha Title and Tax Alpha Solutions. Brokerage services offered through CSG. Investment advisory services offered through CAG. Steve Medendorp is a Florida licensed attorney but does not provide any legal or tax advice. Steve Medendorp and CSG or CAG are not affiliated.
This is not an offer to sell or a solicitation of an offer to buy any security that can only be sold by prospectus or confidential private placement memorandum. Strategies discussed are speculative, illiquid, and involve significant risk, such as potential loss of principal. All investments contain risk and cannot be guaranteed and you can lose some or all of your investment. Investment dividends and interest are not guaranteed and may or may not continue. Reg D offerings are for accredited investors only. There are many factors that determine your accredited investor status. To determine if you meet this status consult with your financial advisor. Past performance is not indicative of future results. This is not every material fact regarding any security or proposal. Prior to making any investment/financial decision you should consult your financial advisor and your accountant. The information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. You should review your monthly account statements for the most accurate information regarding your account.
Tax Alpha Companies, 400 North Ashley Drive, Suite #1900, Tampa, FL 33602, USA
