The Five Legitimate Tax-Favored Mechanisms

NOT LEGAL OR TAX ADVICE. DRAFT — pending professional review. Circular 230 notice applies.

There are dozens of tax-favored structures in the Code. For a self-employed cohort member or single-entity HSN operator, five mechanisms carry most of the lift. Each is a specific carve-out from IRC § 61, the default rule that "all income from whatever source derived" is taxable. Outside these carve-outs, money is taxable.

1. Solo 401(k) — the engine#

Statutory anchor. IRC § 401(a) (qualification), § 401(k) (CODA), § 415(c) (annual additions), § 501(a) (trust exemption). Solo 401(k) is a regular 401(k) plan with no common-law employees other than the owner and spouse. No magic separate Code section.

2026 limits (IRS Notice 2025-67):

| Item | 2026 amount | |---|---| | Employee elective deferral (§ 402(g)) | $24,500 | | Catch-up (age 50+) | $8,000 | | SECURE 2.0 super-catch-up (age 60–63) | $11,250 (replaces $8,000) | | Employer profit-sharing | Up to 25% of compensation (sole prop / single-member LLC: ~20% of net SE earnings after ½ SE-tax adjustment) | | Total annual additions (§ 415(c)) | $72,000 base / $80,000 with catch-up / $83,250 with super-catch-up | | Compensation cap (§ 401(a)(17)) | $360,000 |

Roth component. IRC § 402A allows designated Roth deferrals inside a Solo 401(k). SECURE 2.0 also permits Roth employer contributions. Roth = no deduction now, tax-free growth, tax-free qualified distribution.

Form 5500-EZ. Required once plan assets > $250,000 (or in the final year). $250/day late penalty (capped); IRS Penalty Relief Program available.

Why this is the engine. All dividends, interest, and capital gains inside the trust accumulate tax-deferred (Traditional) or tax-free (Roth). That is the only "exponential growth" available legally. It's not the act of moving money; it's the wrapper around the dollar.

2. Accountable plan — Treas. Reg. § 1.62-2#

Statutory anchor. Treas. Reg. § 1.62-2; IRC § 62(a)(2)(A).

The three tests. A reimbursement is excluded from employee wages if all three hold:

1. Business connection. Expense must be deductible under § 162 and incurred in the employer's business.
2. Substantiation. Within a reasonable time (60-day safe harbor), employee must substantiate amount, time, place, and business purpose.
3. Return of excess. Any advance exceeding actual expenses must be returned within a reasonable time (120-day safe harbor).

Why this matters. Many sole props pay business expenses out of pocket and never reimburse themselves. Once an entity is taxed as an S-corp (or C-corp), an accountable plan lets the owner-employee:

• Get reimbursed tax-free for home-office expenses (post-TCJA, the home-office deduction is unavailable to W-2 employees; an accountable plan restores it for owner-employees).
• Get reimbursed for cell phone, internet, mileage at IRS rate, professional dues, equipment.
• Reimbursements are NOT W-2 wages and NOT 1099 income to the employee — they pass through.

Limitations. Sole proprietors filing Schedule C take these expenses directly; no accountable plan needed. The structure pays off after S-corp election.

3. § 280A(g) — the Augusta Rule#

Statutory anchor. IRC § 280A(g): a homeowner can rent their personal residence for up to 14 days/year to a third party (including their own closely held business) and exclude the rental income from gross income. The business gets a § 162 deduction; the homeowner pays no tax on the rent.

Requirements.

• Rental for legitimate business purposes (board meetings, strategy retreats, training, recipe development with vendors).
• Rate at fair market rental value — supported by comparable hotel meeting rooms / event venues.
• Properly documented: written rental agreement, minutes, paid invoice.
• Total days rented (across all renters) < 15 per year.
• Conservative on rate and documentation when the only renter is the owner's own business; the IRS scrutinizes this.

Why "Augusta." Original legislative concession was for homeowners renting to attendees of the Masters tournament. The statute is general.

4. § 223 — Health Savings Account#

Statutory anchor. IRC § 223.

Triple advantage.

1. Contributions are deductible (above-the-line for individual; pre-tax via payroll).
2. Growth inside is tax-free.
3. Distributions for qualified medical expenses are tax-free.

Eligibility. HDHP coverage; not enrolled in Medicare or other non-HDHP coverage.

2026 limits. Verify in the IRS Rev. Proc. that publishes annual HSA inflation adjustments. 2025 baseline for reference: $4,150 self / $8,300 family.

Why this matters most for self-employed cohort members. Any post-tax dollar inside an HSA does work that no other vehicle does — the only triple-advantage account in the Code. After Solo 401(k), this is the second-most-powerful lever.

5. § 199A — Qualified Business Income deduction#

Statutory anchor. IRC § 199A.

Amount. Up to 20% deduction on qualified business income from a pass-through entity (sole prop, partnership, S-corp).

Phase-outs. Specified Service Trades or Businesses (SSTBs) — law, accounting, consulting, health, financial services, performing arts — phase out above income thresholds. Bakeries, venues, automation platforms, manufacturers are non-SSTB and qualify without phase-out.

Sunset warning. § 199A is currently scheduled to sunset after 2025 unless Congress extends it. Verify current law before any 2026 cohort communication that relies on it. Build the structure expecting it may go away.

Practical implication. Any non-SSTB pass-through cohort entity should compute QBI at year-end. The deduction reduces taxable income directly; for a bakery netting $50K, the deduction is up to $10K — meaningful at any income level.

Comparison table#

| Mechanism | Annual limit (2026) | Best for | Worst for | |---|---|---|---| | Solo 401(k) deferral | $24,500 + employer match | Self-employed with consistent net income | Owners with W-2 employees other than spouse | | Accountable plan reimbursement | No statutory cap; bounded by actual expenses | S-corp / C-corp owner-employees | Sole proprietors (use Schedule C deductions instead) | | § 280A(g) Augusta Rule | 14 days × FMV rate | Closely held business with offsite meeting needs | Anyone trying to use it daily; FMV-rate failure | | § 223 HSA | Approx. $4,150 self / $8,300 family (verify 2026) | HDHP-covered self-employed | Anyone with FSA / Medicare / non-HDHP coverage | | § 199A QBI deduction | 20% of QBI | Non-SSTB pass-throughs | C-corps; SSTBs above phase-out |

What none of these are#

None of the five is "tax-free money sent between people." They are all carve-outs that change how a single party's already-realized income or expense is treated. To repeat the fundamental conceptual repair:

It is not the transfer that is tax-favored. It is the receiving entity's structure.

Stack the structure correctly, and the same dollar of revenue can be (a) deferred in a Solo 401(k), (b) reimbursed via accountable plan, (c) excluded under § 280A(g), (d) compounded tax-free in an HSA, and (e) reduced 20% via QBI on the way out. That stack is what "rich people knowing tricks" actually looks like. It is fully legal. It is also disciplined, expensive, and documented.

NOT LEGAL OR TAX ADVICE. Engage CPA + ERISA attorney before implementing. Circular 230 notice applies.