QBI deduction strategies for high income - how to maximize while in phase-out range?

Thanks for the detailed response. We already max out our Solo 401(k)s, but I didn't realize we could potentially add the profit-sharing portion on top of that. Do both my wife and I qualify for separate profit-sharing contributions since we're both employees/owners? Also, we don't have adult children yet, but the health insurance option might be worth exploring. Currently we're on a marketplace plan - would switching to a plan through the business be more advantageous?

Yes, both you and your wife can receive profit-sharing contributions to your respective Solo 401(k) accounts. The profit-sharing portion is calculated separately for each of you based on your W-2 wages from the S-corp, up to the combined contribution limits. Regarding health insurance, S-corps can establish Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs) or Individual Coverage Health Reimbursement Arrangements (ICHRAs) which may provide tax advantages over marketplace plans. You'd need to compare the premium costs and tax benefits based on your specific situation.

I'm interested in trying this for my consulting business. How exactly does it work with identifying expense allocations? I'm worried I might be missing some legitimate deductions because my CPA seems pretty conservative.

Does this actually work? I've tried other tax software that claimed to do optimization but it just spit out generic advice I could've found with a Google search. How specific were the recommendations?

The expense allocation analysis looks at your business spending patterns and identifies opportunities to properly categorize expenses that might impact your QBI calculation. For example, in my case, it identified some mixed-use expenses that could be more optimally allocated between business and personal use based on IRS guidelines. The recommendations are definitely specific to your situation, not generic advice. For example, it analyzed my business structure and suggested a specific balance between salary and distributions that maximized my QBI while staying compliant with "reasonable compensation" requirements. It even calculated the exact amount I should adjust my salary to optimize the deduction while minimizing audit risk.

How does this actually work? I've tried calling the IRS before and it's always been a nightmare. Do they really get you through faster or is it just another paid service that doesn't deliver?

Sorry, but I'm skeptical that any service can magically get you through to the IRS faster. The IRS phone system is notoriously overwhelmed. And even if you do get through, what makes you think a random IRS agent will know the nuances of QBI optimization for S-corps? Most agents are generalists handling basic filing questions.

The service works by continuously redialing the IRS for you using their automated system. When their system detects an available agent, it calls your phone and connects you directly to the IRS agent. I didn't have to sit on hold at all - I just went about my day until my phone rang. Regarding your second question, you're right that many IRS agents are generalists. However, once I got through, I specifically asked to be transferred to someone who specialized in pass-through taxation and QBI. The first agent was happy to transfer me to someone with more expertise. The specialist I spoke with was extremely knowledgeable about S-corps and QBI phase-out strategies.

I've heard about defined benefit plans but was concerned about the administrative complexity and costs. How much does it cost you annually to maintain? And did you need specialized help setting it up properly?

The administrative costs run about $2,500-3,000 annually for our plan, plus there's an actuary who needs to certify the contributions each year. We also paid around $4,000 for initial setup. It sounds expensive, but we saved over $40,000 in taxes the first year by preserving our full QBI deduction and reducing our overall tax rate. You absolutely need specialized help setting it up - we used a third-party administrator who specializes in small business retirement plans. The key is finding someone who understands both the retirement plan rules AND how they interact with QBI calculations. Not all CPAs understand this intersection well.

But doesn't that just give you the QBI benefit in one year and then lose it in the following years when you don't make contributions? Seems like it would just create a roller coaster effect rather than a consistent strategy.

We did a cost segregation study two years ago on our retail space, and it generated about $175,000 in additional first-year depreciation. Completely eliminated our QBI phase-out issue that year. Just make sure you're working with a reputable firm that specializes in retail properties - the quality of the study makes a huge difference in defensibility. Another thing to consider: bonus depreciation is still available but at a reduced percentage for 2025, so it's not as powerful as it was a few years ago, but still valuable.

Thanks for sharing your experience! That's a significant amount of depreciation. Did you have any issues with recapture when calculating QBI in subsequent years? I've heard mixed things about how depreciation recapture impacts QBI calculations long-term.

This is incredibly helpful - thank you for breaking down the specific numbers! I'm 42 and in a similar income situation with our S-corp. A couple of questions: How did you find a provider for the cash balance plan, and roughly what are the annual administrative costs? Also, when you mention adjusting the salary/distribution mix, do you have a rule of thumb for what's considered "reasonable compensation" to avoid IRS issues? I've heard conflicting advice on this from different sources.

For cash balance plan providers, I worked with a third-party administrator that specializes in small business retirement plans - I found them through my CPA's network. Annual admin costs run about $3,500-4,000, plus setup was around $5,000. Sounds expensive but the tax savings far outweigh the costs. Regarding reasonable compensation, there's no hard rule, but generally you want to pay yourself what you'd pay someone else to do your job. For S-corp owners, I've seen recommendations of 40-60% of net business income as salary, but it really depends on your industry and role. In retail, if you're actively managing operations, customer service, inventory, etc., you might justify a higher salary. The key is being able to document and defend why your compensation is reasonable for the work you actually perform. I keep detailed records of my hours and responsibilities to support our salary level. My CPA also runs periodic benchmarking against similar roles in our area to make sure we're in a defensible range. The IRS tends to scrutinize very low salaries more than slightly higher ones, so we err on the side of caution while still optimizing for QBI.

Great point about the SIMPLE IRA option! I hadn't considered that we could potentially layer multiple retirement plan types. Just to clarify - can you have both a Solo 401(k) AND a SIMPLE IRA for the same business? I thought there were restrictions on combining different plan types, but maybe I'm misunderstanding the rules. The timing advice on salary adjustments is really valuable too. We were actually thinking about making changes mid-year, so I'm glad you mentioned the potential red flag issue. It makes sense that consistency would be important from an audit perspective. Did your CPA give you any specific guidance on what constitutes "suspicious" timing for salary changes, or is it more of a general best practice to avoid any mid-year adjustments? Also, love the idea about accelerating business purchases. We've been putting off upgrading our POS system and some display fixtures - sounds like this might be the perfect time to move forward with those investments.

Actually, you typically can't have both a Solo 401(k) and a SIMPLE IRA for the same business entity - they're considered conflicting plan types under IRS rules. Brian might be thinking of a different configuration or possibly has multiple business entities. However, there are other stacking options that do work. For example, you could potentially add a defined benefit plan (like Bethany mentioned) or consider a cash balance plan (as Saleem detailed) on top of your Solo 401(k). These combinations can be incredibly powerful for high-income S-corp owners in the QBI phase-out range. Another approach that might work for your retail business: if you have any 1099 contractors or could legitimately reclassify some work to independent contractors, you could potentially set up a SEP-IRA for the business side while maintaining your Solo 401(k)s personally. But this gets complex quickly and definitely requires careful structuring to stay compliant. For the salary timing issue, my CPA told me that mid-year salary changes without clear business justification (like role changes, market adjustments, or significant business growth/decline) can trigger scrutiny. The IRS prefers to see consistent compensation patterns that reflect actual business needs rather than tax optimization moves.

Thanks for mentioning the HSA option - that's one I completely overlooked! We do have a high-deductible health plan, so maxing out HSA contributions is definitely something we can implement immediately. Every thousand dollars helps when you're trying to stay below those phase-out thresholds. The ESOP suggestion is interesting but probably too complex for our situation right now. However, the home office deduction point is really valuable. I've been using the simplified method, but given our income level, it might be worth calculating the actual expense method to see if we can get a larger deduction. Do you happen to know if there are any special considerations for S-corp owners claiming home office deductions compared to sole proprietors? Also, regarding the family partnership idea - we don't have adult children yet, but I'm curious about the mechanics. Would this involve actually gifting ownership stakes in our retail business, or are you referring to creating separate partnership entities for certain business activities? The income shifting concept sounds promising for future planning as our kids get older.

For S-corp owners claiming home office deductions, there are a few key differences from sole proprietors. You'll typically claim the deduction on Form 8829 and then the business reimburses you for the home office expenses, rather than taking it directly on Schedule C like sole proprietors do. This creates a legitimate business expense for the S-corp while providing you with tax-free reimbursement. The actual expense method might indeed be better for you given your income level - especially if you have significant mortgage interest, property taxes, utilities, or depreciation that can be allocated to the business use percentage. Just make sure to keep detailed records and photos of your dedicated office space. Regarding family partnerships, there are actually several approaches. The most common for retail businesses is gifting minority interests in the S-corp itself to adult family members (though this requires careful valuation and gift tax planning). Alternatively, you could create separate LLCs for specific business activities (like real estate if you own your building) and gift interests in those entities. The key is ensuring any family members receiving income are actually providing legitimate services to justify the income shifting. Given your current situation with the QBI phase-out, I'd focus on the immediate strategies first - HSA maximization, home office optimization, and the retirement plan enhancements others mentioned. The family planning strategies are great for future years as your children reach adulthood.