Tax planning is not a one-time exercise. Decisions made when a business is formed can affect its owners for years, while expansion, profitability, and a potential sale create new opportunities and risks. An effective strategy evolves with the business, taking into account its legal structure, cash flow, owners’ objectives, and applicable federal, state, and local tax laws.

Although the appropriate approach depends on the facts, four stages of the business lifecycle offer a useful framework for identifying important tax considerations.

1. Startup: Build a Strong Tax Foundation

During the startup stage, decisions about entity structure, initial expenditures, and employee benefits can have lasting consequences. Addressing these issues before operations begin can help avoid unnecessary costs and preserve flexibility as the business grows.

Select an appropriate legal and tax structure

A business may operate as a sole proprietorship, partnership, corporation, or limited liability company (LLC). Importantly, an LLC is a legal form rather than a separate federal income tax classification. Depending on its ownership and elections, it may be treated as a disregarded entity, partnership, C corporation, or S corporation for federal tax purposes.¹

A sole proprietorship generally offers simplicity, but the owner ordinarily remains personally responsible for business obligations. Partnerships generally pass income, losses, and other tax items through to their partners, subject to detailed allocation and deduction rules. An LLC often provides liability protection under state law, although guarantees, misconduct, and other circumstances can expose owners to liability.

A C corporation generally pays federal income tax on its taxable income, currently at a 21% rate; shareholders may face a second level of tax on dividends. An S corporation generally passes federal taxable income and other items through to eligible shareholders, subject to eligibility, compensation, basis, and distribution rules. Owner profits in an S corporation may avoid self-employment taxes if structured correctly and if applicable owners receive appropriate wage compensation from the entity. In many cases, the best structure depends on anticipated profits, financing needs, investor requirements, owner compensation, and long-term exit plans. State tax treatment may differ from federal treatment.

For some qualifying C corporation businesses, qualified small business stock (QSBS) rules under Internal Revenue Code Section 1202 can provide a substantial exclusion of gain on a future stock sale. Eligibility depends on original issuance, the corporation’s assets and activities, holding period, and other requirements. Changes enacted in 2025 expanded certain benefits for newly acquired stock, making early evaluation of QSBS especially important.²

Identify and classify startup expenditures

Costs incurred before an active trade or business begins are not necessarily immediately deductible. Under Section 195, qualifying startup expenditures generally may support a deduction of up to $5,000 in the year the business begins, reduced dollar for dollar when eligible costs exceed $50,000. Remaining qualifying costs are generally amortized over 180 months beginning when the active business starts. Organizational costs are subject to separate rules, while equipment and furniture ordinarily are evaluated under depreciation or expensing provisions.³

Accurate classification and documentation of these expenditures can prevent lost deductions or incorrect reporting. Home-office deductions may also be available when the applicable requirements are satisfied.

Evaluate employee retirement benefits

Retirement plans may help a young business attract employees while creating potential tax benefits. Depending on the plan and circumstances, employer contributions may be deductible, and eligible small employers may qualify for startup-cost credits or additional credits related to certain employer contributions. SEP IRAs, SIMPLE IRAs and 401(k) plans have different eligibility, funding and administrative requirements.⁴

2. Growth: Plan for Expansion and New Opportunities

As operations expand, the business may hire employees, invest in technology, or enter new markets. Tax planning should evolve alongside those decisions rather than become an afterthought.

Assess research-related deductions and credits

Businesses developing or improving products, processes,s or software may qualify for the federal research credit if their activities and expenditures meet the statutory tests. The credit is distinct from the income tax deduction for research expenditures. For tax years beginning after December 31, 2024, qualifying domestic research and experimental expenditures generally may be deducted currently under Section 174A, subject to elections and special rules; foreign research expenditures receive different treatment.⁵

Certain qualified small businesses may elect to apply up to $500,000 of eligible research credit against specified employer payroll taxes. The election has gross-receipts, business-age, and filing requirements. Research credit claims require careful documentation of the work performed and qualifying costs.⁶

Review state and local tax exposure

Opening a new office, adding remote employees, selling into additional states or acquiring property may create income, franchise, sales, use, property or payroll tax obligations. A business should evaluate potential tax nexus and registration requirements before expanding, even when no physical location is established in the new jurisdiction.

When deciding where to expand or relocate, management should also consider available economic development incentives alongside labor costs, infrastructure, real estate expenses, and broader operational needs. Incentive programs often impose application deadlines and continuing compliance obligations.

Reassess compensation and tax elections

Growth can change the relative benefits of owner compensation, employee incentives,s and available entity-level elections. For example, some pass-through businesses may benefit from state pass-through entity tax elections, but the impact depends on the jurisdiction and the owners’ circumstances. Regular projections can help align estimated payments, cash distributions,ns and tax obligations.

3. Maturity: Manage Profitability and Cash Flow

Established businesses often focus on preserving earnings, replacing equipment, and controlling cash flow. The objective is not simply to maximize deductions in one year, but to evaluate their overall economic and tax effects.

Coordinate capital spending with depreciation rules

Purchases of qualifying business property may generate deductions through Section 179 expensing or bonus depreciation. For tax years beginning in 2026, the Section 179 limit is $2,560,000, with a dollar-for-dollar phaseout when the cost of qualifying property placed in service exceeds $4,090,000. Section 179 also has a taxable-income limitation and other restrictions.⁷

Separately, current law generally permits 100% bonus depreciation for eligible property acquired after January 19, 2025. The applicable acquisition and placed-in-service dates, asset type, and other requirements matter. A purchase by itself does not necessarily produce a current-year deduction: the asset generally must be placed in service.⁸

The timing of equipment purchases should be driven first by legitimate business needs. Accelerated deductions can improve current-year cash flow but may reduce future depreciation deductions.

Evaluate timing of income and deductions

Businesses should review their tax accounting methods and compare projected taxable income across years. Under the cash method, income generally is reported when actually or constructively received and expenses generally are deducted when paid, subject to important exceptions. Accrual-method businesses follow different recognition rules. A change in accounting method may require Form 3115 and can produce a Section 481(a) adjustment.⁹

Deferring income or accelerating deductions does not automatically lower total tax. The result depends on expected tax rates, limitations, cash needs, and the owners’ tax circumstances. Cash-method eligibility and the rules governing advance payments, receivables and prepaid expenses require individual analysis.

Make charitable giving part of a broader plan

Philanthropic contributions may support a business’s mission, but the tax treatment depends on who makes the contribution and whether the payment is a charitable gift or a deductible business expense, such as qualifying advertising. Contributions by partnerships and S corporations generally pass through to owners rather than becoming ordinary operating deductions of those entities.

For 2026, individuals who itemize generally face a new floor equal to 0.5% of adjusted gross income for charitable contribution deductions, while C corporations generally face a 1% taxable-income floor, subject to applicable limitations and carryover provisions. Planning should account for these rules and for the owners’ individual situations.¹⁰

4. Transition or Exit: Protect Value and Plan Ahead

Succession and exit planning should begin well before a transaction is contemplated. A transition may involve an internal leadership change, transfer to family members, sale to employees, or acquisition by an outside buyer. Each path presents different ownership, valuation,n and tax considerations.

Develop and maintain a succession plan

An effective succession plan identifies critical management roles, potential successors, ownership-transfer goals, and the timeline for transition. It also addresses governance, liquidity, business continuity and the potential effects of an owner’s disability or death. Coordination among legal, financial and tax advisors can help preserve enterprise value and reduce disruption.

Evaluate transaction structure before negotiations

A sale of equity and a sale of business assets can produce significantly different tax consequences. The treatment depends on whether the business is a corporation, partnership, or disregarded entity; how the consideration is allocated; and whether the transaction involves cash, rollover equity, installment payments, or contingent proceeds. Sellers and buyers often have competing preferences, making advance modeling essential.

For eligible shareholders of a C corporation, a stock sale may qualify for benefits under the QSBS rules. In other situations, gain may include ordinary-income components, such as depreciation recapture or certain partnership “hot assets.” Transaction expenses and management incentive arrangements should also be reviewed before agreements are finalized.

Consider charitable strategies before a sale becomes binding

Owners with philanthropic goals may explore donating eligible appreciated ownership interests to a public charity or donor-advised fund before a proposed sale. Such arrangements require careful attention to timing, valuation, transfer restrictions, the type of entity, and assignment-of-income rules. Once contributed to a donor-advised fund, assets are legally controlled by the sponsoring charity, although donors generally retain advisory privileges over future grants.¹¹

A charitable deduction and avoidance of capital gain are separate potential benefits. The outcome depends on the transaction’s timing and structure as well as deduction limitations, including those applying in 2026. These strategies should be reviewed with tax and legal advisors before signing a binding sale agreement or taking other steps that may fix the right to sale proceeds.

An Ongoing Process, Not a One-Time Decision

A business’s tax strategy should evolve as its operations, profitability, and ownership objectives change. Regular reviews can identify emerging tax obligations, preserve available incentives, and help owners make informed decisions before transactions occur.

At Hightower Signature Wealth, our advisors work with business owners to integrate tax considerations into broader financial and transition planning, in coordination with their tax and legal professionals. Contact our team to discuss planning priorities at the current stage of a business’s lifecycle.

Sources

¹ IRS, “Entities”: https://www.irs.gov/faqs/small-business-self-employed-other-business/entities

² Internal Revenue Code § 1202; IRS, Instructions for Schedule D (Form 1120-S): https://www.irs.gov/instructions/i1120ssd

³ Internal Revenue Code § 195; IRS, Publication 583: https://www.irs.gov/publications/p583

⁴ IRS, “Retirement plans startup costs tax credit”: https://www.irs.gov/retirement-plans/retirement-plans-startup-costs-tax-credit

⁵ Internal Revenue Code § 174A; IRS, Instructions for Form 6765: https://www.irs.gov/instructions/i6765

⁶ IRS, “Qualified small business payroll tax credit for increasing research activities”: https://www.irs.gov/businesses/small-businesses-self-employed/qualified-small-business-payroll-tax-credit-for-increasing-research-activities

⁷ IRS, Publication 946, 2026 limits: https://www.irs.gov/publications/p946

⁸ IRS, News Release IR-2026-06 (January 14, 2026): https://content.govdelivery.com/accounts/USIRS/bulletins/4045aa2

⁹ IRS, Publication 538, “Accounting Periods and Methods”: https://www.irs.gov/publications/p538

¹⁰ Internal Revenue Code § 170: https://uscode.house.gov/us/usc/119-120/t26/s170/

¹¹ IRS, “Donor-advised funds”: https://www.irs.gov/charities-non-profits/charitable-organizations/donor-advised-funds