Using entity-structuring conversations to open the advisory door

There is a version of this conversation that happens every year in tax practices: A client comes in for their S-corp return, you notice the salary looks light, you flag it in the notes, maybe mention it briefly at pickup, and move on. The return gets filed, the client leaves, and the advisory opportunity disappears for another 12 months.

There is another version: You call that same client in June, walk through the compensation picture, model out two or three scenarios, and by the end of the conversation, you’re discussing retirement plan design, the QBI deduction, and whether a C-corp conversion might be worth exploring given their growth trajectory. Same client. Same technical knowledge on your end.

What changed was the conversation. That is the difference between compliance and advisory.

Entity structuring, especially S-corp optimization, is one of the cleanest advisory entry points available. It is technical, it has a measurable tax impact, and it naturally expands into retirement planning, succession strategy, and exit discussions. If you’re building advisory into your firm, this is a practical place to start.

The S-corp opportunity: what most clients don’t understand

The mechanics are familiar. An S-corp owner pays themselves a reasonable salary subject to payroll taxes, and takes additional distributions that are not subject to FICA. The payroll tax savings can be meaningful, often $5,000 to $25,000 or more, annually, for a profitable owner. That outcome depends on the structure being maintained correctly year after year.

What most clients do not understand is that “reasonable compensation” is not a fixed number, and that getting it wrong in either direction creates problems. Set the salary too low, and the IRS has an increasingly active enforcement posture on S-corp compensation, particularly for profitable service businesses. Set it too high, and you’re leaving money on the table through unnecessary payroll tax exposure.

The advisory opportunity is in the modeling. When you show a client their after-tax position across two or three salary scenarios, factoring in payroll tax, QBI impact, retirement contribution limits, and state-level considerations, you are delivering something they cannot get from a tax preparation service alone. You are now quantifying a decision.

Reasonable compensation technical framework

Guidance and case law says that S-corp shareholder-employees must be paid a salary commensurate with the services they provide. While “reasonable” is inherently fact-specific, the IRS and courts commonly look at the following areas:

• Role and qualifications. Training, experience, and duties performed by the shareholder-employee.
• Comparable compensation. What the corporation would pay an unrelated employee to perform the same services.
• Time devoted. The time and effort devoted to the business. Passive investors with no active role have a stronger argument for lower or zero salary.
• Distributions-to-salary ratio. Minimal salary paired with large distributions is an audit flag.
• Business performance. The financial condition of the business. Salary can be adjusted during periods of genuine financial stress, but consistency matters.

In practice, the most defensible approach is a combination of internal analysis—for example, what is the owner actually doing, and how many hours—and external benchmarking, such as “What would you pay someone to do that job?” Tools such as  the RSSC (Reasonable S-Corp Compensation) calculation framework, BLS Occupational Employment Statistics, and industry-specific salary surveys all support a documented position.

ProTip: Document the analysis annually. Roles evolve. Revenue grows. Staff changes. A salary that was reasonable three years ago may not be reasonable today. A brief annual memo in the client file is inexpensive protection against an IRS challenge.

The QBI interaction: Why salary level matters more than ever

One of the most consequential planning considerations for S-corp owners since the One Big Beautiful Bill (OB3) is the interaction between W-2 compensation and the Section 199A QBI deduction. 

Starting in 2026, OB3 expands the phase-in ranges for specified service trades or businesses (SSTBs), and businesses subject to the wage and property limitation.

The phase-in range increases:

• From $100,000 to $150,000 for married filing jointly.
• From $50,000 to $75,000 for all other filers.

That translates into the following 2026 ranges:

• $403,500 to $553,500 for joint filers (up from $394,600 to $494,600 in 2025).
• $201,750 to $276,750 for single filers and heads of household (up from $197,300 to $247,300 in 2025).

Some pass-through owners who previously phased out of the deduction may now qualify. Planning strategies that were necessary to reduce the wage limitation impact in prior years may no longer be as critical for certain clients.

For S-corp owners, this still brings us back to wages.

Above the threshold, the QBI deduction for non-SSTBs is limited to the greater of:

• 50% of W-2 wages, or
• 25% of W-2 wages plus 2.5% of qualified property.

That means compensation planning continues to directly affect the size of the deduction.

A profitable owner paying themselves a low salary may not only create reasonable compensation risk, but may also be limiting their QBI deduction because there are not enough W-2 wages to support the full 20% benefit.

The modeling here matters.

Compare the payroll tax cost at higher salary levels against the incremental QBI deduction allowed under the wage limitation. In some cases, increasing salary improves the overall tax result. In others, it does not. The answer depends on the numbers.

OB3 also introduced a minimum QBI deduction of $400, indexed for inflation, for taxpayers with at least $1,000 of QBI from one or more active businesses in which they materially participate. The taxpayer must show regular, continuous, and substantial involvement in the activity. This provision will not move the needle for larger businesses, but for smaller active businesses that were previously phased out or limited to zero, it creates a floor that did not exist before.

The advisory opportunity here is straightforward.

Run the numbers again in 2026. Do not assume last year’s analysis still applies. When you walk a client through how wage levels, income thresholds, and entity structure affect their QBI deduction, you are helping them evaluate tradeoffs using current law.

That is advisory.

The entity conversion conversation: when to raise it

Beyond optimizing an existing S-corp, the entity-structuring conversation sometimes leads somewhere more fundamental: Should this business be a different entity type entirely? With OB3 now settled into law, a few specific scenarios make this conversation worth having in 2026:

S-corp to C-corp for Qualified Small Business Stock planning

For clients with growth-stage businesses that could potentially be sold in 3-5 years, the expanded Qualified Small Business Stock (QSBS) exclusion under OB3 is a compelling reason to evaluate C-corp status. A qualifying C-corp with gross assets under $75 million at issuance may allow a gain exclusion of up to $15 million, or 10 times basis, per shareholder.

The critical caveat is that only post-conversion appreciation qualifies. A business that converts from an S-corp or LLC to a C corporation does not generate QSBS until C corporation stock is issued. The 5-year holding period begins at that time.

LLC to S-corp for established profitable businesses

For sole proprietors or single-member LLCs generating high net income, the S-corp election remains one of the most straightforward tax planning moves available. The payroll tax savings on the distribution portion of income, combined with the QBI deduction optimization discussed above, typically justify the administrative cost of maintaining payroll.

The right time to raise this is not at tax filing but at mid-year when you have a clear picture of the prior year’s profitability. The return is complete. The numbers are final. You can see exactly how salary, distributions, and QBI played out. That gives you real data to work with.

Multi-member LLC vs. partnership vs. S-corp

For clients with business partners, the entity structure question involves additional layers: Basis rules differ between partnerships and S-corps, the ability to make special allocations exists only in partnerships, and certain fringe benefit rules are more favorable for C-corps. These conversations require careful analysis but are exactly the kind of high-value advisory work that distinguishes a strategic tax advisor from a return preparer.

ProTip: Do not have entity structure conversations in the middle of busy season. Build a June and July advisory calendar. Schedule 15-20 business owner reviews. You will identify more opportunities and have time to implement changes before year-end.

Moving the conversation forward: from compliance to advisory

Technical knowledge alone does not create advisory. Conversations do. Here is a framework:

1. Start with an observation. “When reviewing your return, I noticed your salary-to-distribution ratio has shifted. I want to make sure we’re positioned correctly and run a few numbers on whether there is a better structure.”
2. Quantify the opportunity. Show the model. Even a simple spreadsheet comparing two or three scenarios will be good: current salary, IRS-defensible salary, optimized salary accounting for QBI. Numbers create clarity.
3. Ask the forward-looking question. “What does the next 3-5 years look like for this business?” The answer to that question determines which planning levers matter most.
4. Propose a defined next step. No, this isn’t another tax return, it’s a specific deliverable. A compensation analysis memo. A retirement plan comparison. A QSBS eligibility review. Give them something tangible that extends the relationship beyond just filing their returns.

The professionals building advisory practices are not doing something fundamentally different from what you already do. They are simply being more intentional with conversations they were already having. Entity structuring is the ideal starting point because the technical skill is already there. It just needs to be positioned differently.

A final thought. The advisory practice you build this year is the one that protects you from commoditization over the next decade. AI tools are already capable of preparing routine returns. They are nowhere close to replacing the judgment, relationships, and proactive guidance that define a great tax advisor. The entity structuring conversation is one place where that value is immediately visible to the client. Start there.