By: Deen Cadi, CPA, MSc, Founder and Managing Member, Deen Cadi CPA, PLLC
A case study for CEOs and CFOs models how a $600,000 year-end prepayment to a C corporation can produce about $876,000 in tax saved or earned over five years, and why the sale date alone can swing the final tax bill by $282,225
WEST PALM BEACH, Fla., November 06, 2026. CPA Deen Cadi: A December Tax Deduction Can Be the First Step Toward a Tax-Free Business Exit
As profitable business owners head into year-end, Deen Cadi, CPA, founder and managing member of Deen Cadi CPA, PLLC, is urging CEOs and CFOs to stop treating December as a one-time deduction exercise and start treating it as the first step of a multi-year plan for growth, exit, and succession. Using a hypothetical company, he shows how a single year-end decision can move from a $222,000 reduction in this year’s federal tax to a $3.6 million business sold free of federal capital gains tax.
“Every December, profitable owners have two conversations: one about this year’s tax bill and one about funding next year’s growth,” Cadi said. “They work better as one. A year-end deduction is worth far more when it is the first step of a plan than when it is the whole plan.”
The Idea in Plain English
Think of taxable profit as water in a tank that empties every December 31. A legitimate business expense paid before that date lowers the level for the year. Now suppose the payment goes to a separate C corporation whose tank empties on June 30. The December payment lands in that company’s tax year ending the following June. It spends most of the money doing real marketing work, so only its remaining profit is taxed, at the 21% federal corporate rate rather than an owner’s individual rate of up to 37%.
The income is never erased. The opportunity lies in when it is taxed, how much real expense offsets it, and which rate applies. If the C corporation is built correctly, it may one day be sold free of federal capital gains tax.
A Hypothetical Example: Harbor Point Logistics
The owner of Harbor Point Logistics, a Florida S corporation on a calendar year and the cash method, expected $2.4 million of 2026 taxable profit and had already approved a $600,000 marketing program for the first half of 2027. In November 2026, the owner formed Northstar Growth Studio, Inc., a C corporation with a July 1 to June 30 fiscal year, buying its shares directly from the company for $50,000. Northstar hired a marketing team and began building a lead-generation platform it owns, designed to win outside clients and someday be sold.
Getting there took most of the fall. Before anything was signed, the owner’s advisors worked through the eligibility questions, including ownership, accounting methods, whether Northstar could use a June 30 year without being treated as a personal service corporation, and how the combined state and federal picture looked. Pricing came next. Outside agency bids gave the two commonly controlled companies a defensible, arm’s-length figure for the work.
The contract signed in November defined the campaigns, set a January to June 2027 service period, spelled out reporting, and fixed the fee at $600,000. Harbor Point paid it in December. The timing of that deduction follows the IRS 12-month rule, which generally allows a cash-method business to deduct a prepayment when the benefit does not extend beyond the earlier of 12 months after it begins or the end of the following tax year.
Northstar delivered the campaigns over the first half of 2027 and kept the paper trail that went with them, including invoices, performance reports, and lead data. Its fiscal year closed on June 30, 2027, after which it deducted its delivery costs and filed in October.
The First-Year Numbers
Harbor Point’s $600,000 payment is deductible in 2026, which reduces the owner’s 2026 federal tax by $222,000 at the 37% rate. Northstar spends $480,000 delivering the work through media, its team, and its tools, leaving $120,000 of taxable profit. Northstar’s tax on that profit is $29,050, combining the 21% federal rate with Florida’s 5.5% tax on income above $50,000, an effective rate of about 24.2%. That leaves $90,950 in Northstar to fund growth.
Northstar’s profit is taxed at about 24.2% instead of 37%, saving $15,350 in the first year. If the owner qualifies for the 20% qualified business income deduction, the owner’s effective rate may be closer to 29.6%, which narrows the savings. The advantage depends on reinvesting: profit paid out as dividends is taxed twice, about $42 of every $100 in total, so Northstar’s profit stays in Northstar.
From One Tax Season to a Five-Year Plan
For C corporation stock issued after July 4, 2025, qualified small business stock (QSBS) rules allow owners to exclude 50% of qualifying gain after three years, 75% after four, and 100% after five, up to the greater of $15 million or ten times basis, for companies with no more than $75 million of gross assets at issuance.
The plan assumes Harbor Point keeps buying $600,000 of marketing each year at market price, and Northstar reinvests its after-tax profit to win outside clients at the same 20% margin.
In its first fiscal year, ending June 2027, Northstar serves only Harbor Point and earns $120,000 of taxable profit, paying $29,050 of tax and reinvesting $90,950. By fiscal 2029, $1.2 million of outside-client revenue lifts taxable profit to $360,000, with $92,650 of tax and $267,350 reinvested. By fiscal 2031, $3 million of outside revenue brings taxable profit to $720,000, with $188,050 of tax and $531,950 reinvested. Across all five years, Northstar earns $6.7 million of outside revenue and $1.94 million of taxable profit, pays $500,350 of corporate tax, and reinvests $1,439,650.
In December 2031, just past the fifth anniversary of the share purchase, Northstar is sold for five times its final-year profit, or $3.6 million. On a $3,550,000 gain, ordinary stock would owe about $844,900 of federal tax. Qualifying QSBS held five years owes nothing.
“The calendar matters as much as the structure,” Cadi said. “A sale in August 2031 feels like five years, but it is three months short. That sale qualifies for only the 75% exclusion and owes about $282,225. The five-year clock starts the day the shares are issued, not on January 1, and in this example the sale date was settled well before a buyer could set it.”
How the Savings Stack Up
Measured against one consistent alternative, the same business with the same results run as a pass-through taxed at 37%, the plan produces savings in three layers. Keeping the $222,000 deduction head start invested at 8% for five years is worth about $104,191. Taxing Northstar’s profit at corporate rates rather than 37% saves $217,450. A tax-free exit, compared with a taxed pass-through sale, saves $554,016. Together, the plan produces about $876,000 of tax saved or earned.
If the pass-through alternative qualified for the 20% qualified business income deduction, the total would be closer to $677,000, still more than three times the $222,000 a year-end-only view would capture. The gap keeps growing after the sale: invested at 7% for ten years, $3.6 million of tax-free proceeds grows to about $7.08 million, compared with about $5.99 million after a taxed sale, a difference of about $1.09 million.
Connecting the Other Planning Pieces
– Timing: a planned truck purchase moved into December 2026, placed in service before year-end, to use permanent 100% bonus depreciation in the high-income year.
– Exit for Northstar: a non-grantor trust for the owner’s children received shares while their value was nominal. As its own taxpayer, it can carry its own QSBS cap, and that growth builds outside the owner’s estate. A grantor trust would share the owner’s cap instead.
– Exit for Harbor Point: S corporation stock does not qualify for QSBS. An ESOP sale under Section 1042 applies only to C corporation stock and would require ending the S election well before a sale.
– Succession: with the $15 million estate and gift exemption now permanent, gifts of non-voting Harbor Point shares were scheduled over several years, and company-owned life insurance was reviewed in light of Connelly v. United States.
Where the Rules Draw the Line
– Real substance: transactions driven mainly by tax effects can face economic substance penalties of 20% to 40%, with no reasonable-cause defense.
– Accounting method and fiscal year: accrual-method payers face a stricter three-and-a-half-month rule, and personal service corporations generally must use a calendar year.
– QSBS eligibility: consulting, brokerage, and businesses built on an employee’s reputation or skill are excluded. Marketing sits in a gray area, which is why Northstar’s model centered on execution and owned technology rather than advice, supported by a written analysis.
– Money at work: at least 80% of Northstar’s assets must be used in its active business, and retained profit above $250,000 needs a documented business purpose to avoid the 20% accumulated earnings tax.
– A stock sale to a real buyer: buyers value outside clients and owned systems far more than related-party revenue.
“The value in this example did not come from one clever deduction,” Cadi said. “It came from treating December as one step in a five-year plan, where each year’s savings funded growth, growth built value, and that value was positioned to be realized with as little tax as the law allows. The window for 2026 closes on December 31. The planning that makes it count starts well before then.”
About Deen Cadi CPA, PLLC
Deen Cadi CPA, PLLC is a boutique CPA and strategic tax advisory firm serving business owners, executives, and families. Founder Deen Cadi, CPA, has been a CPA since 2008 and brings more than two decades of experience across banking, private equity, corporate finance, and tax advisory, including more than a decade working alongside the family offices of multi-billion-dollar families. The firm’s mission is to make the planning tools long used by the ultra-wealthy available to high-income families and business owners. Deen Cadi is licensed as a CPA in Arizona, Florida, Massachusetts, Texas, and Wyoming. The firm has offices in West Palm Beach, Fla.; Houston, Texas; and Jackson Hole, Wyo.
Learn more about the firm at Deen Cadi CPA, PLLC.
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Disclaimer: This release is general education for U.S. taxpayers and is not tax, legal, or investment advice. The client example is hypothetical and simplified, and actual results depend on each company’s facts and current law.
