FPC Blog

The Silent Saver-How High-Net Worth Individuals are Leveraging MSOs for Tax Savings



Are you leaving money on the table? If you or your parents fall under the category of high-net-worth individuals and are not strategically utilizing the expertise of advisory firms like Sky Tower Council, then you’re likely missing out on significant tax savings opportunities. Here’s why. 

For wealthy entrepreneurs and business owners, taxes can be one of the biggest threats to long-term wealth preservation and continued growth. The hard truth is that without proper tax planning, high income individuals can see nearly half of their earnings consumed by federal, state, payroll, investment, and other taxes. This persistent drain on resources not only limits wealth accumulation in the present, but also cripples the ability to foster generational financial security and engage in meaningful philanthropy. 

Fortunately, solutions exist to counteract the corrosive effects of taxation. Read on to discover a little-known but powerful tax-minimization strategy called Management Service Organizations (MSOs). This specialized corporate structure holds the key to unlocking immense tax savings for high-net-worth families and preserving hard-earned wealth for heirs and charitable endeavors. 

The Problem: High Taxes Eroding Wealth 

Overview of the Problem: The challenge high-net-worth individuals face in managing wealth and taxes is that ineffective strategies often lead to unnecessarily high tax payments. Without proper planning, total rates can approach 50% when combining federal, state, payroll, and investment taxes. This persistent drain on resources erodes wealth instead of allowing it to compound. 

Consider that the top federal income tax bracket is currently 37% for ordinary income over $539,900 (single filers) and short-term capital gains are taxed at the same rates1. Then factor in state income taxes up to 13.3%, the 3.8% Net Investment Income Tax, 15.3% self-employment taxes, and more2. Taxation at the federal and state levels combined can clearly approach 50% or more on some types of income for high earners. 

This extreme tax burden limits how much wealthy individuals can reinvest into growth opportunities or set aside for philanthropic initiatives. Costly missteps can also trigger tax bills that could have been avoided with proactive planning. Either way, the high tax regime hampers prosperity for America’s most financially successful citizens. 

Personal Experiences: John Smith*, a high-net worth entrepreneur client of STC with over $10 million in annual income, saw nearly half his earnings consumed by taxes. Despite his hard work growing a successful business, the high tax burden limited his ability to reinvest in growth or engage in desired philanthropy. “It felt like working hard to put money into a leaky bucket,” he lamented. “There had to be a better way.” 

Jane Doe*, a multi-millionaire author of children’s books and real estate investor, had a similar experience. “Between federal, state, and self-employment taxes, I would sometimes look at my income statement and realize that the government made more from my work than I did,” she says. “It was incredibly frustrating.” 

These stories paint a picture of taxpayers who aspired to grow their income sustainably and contribute meaningfully to causes they cared about. But the existing tax regime drained their resources and hampered their goals for financial security and philanthropy. A solution was desperately needed. 

*Names changed to protect privacy 

Ah Ha Moment: Introduction to the strategic use of Management Service Organizations (MSOs) as a solution for tax savings. 

The Solution: MSOs Decoded 

An MSO (Management Service Organization) is a separate corporate entity that provides centralized services, resources, and assets to the various operating companies under the same parent business. Typical services consolidated under an MSO include accounting, legal, human resources, marketing, information technology, equipment leasing, real estate, and more. 

The key advantages of an MSO stem from structuring it specifically as a C-corporation while keeping the operating companies as pass-through entities (S-corps, LLCs, partnerships, sole proprietorships). This enables shifting income from the high individual rates of pass-throughs to the lower corporate rates of a C-corp under the MSO’s roof3. It would be fair to say that an MSO makes taxes “disappear” like the Bermuda Triangle.

Establishing clear separation between the MSO and operating companies is crucial to preserve limited liability advantages. The MSO should be adequately capitalized and staffed to demonstrate it is operating as a real business providing needed services at fair market rates5

Key Benefits of MSOs: 

One of the most powerful benefits of an MSO is the ability to cut tax rates dramatically on excess income by shifting it from individual rates to more favorable corporate rates4

For example, consider an individual with $100,000 in excess income beyond personal spending needs. If this flows through to their individual tax return, it is subject to the top rate of 37% plus the 3.8% Net Investment Income Tax. That results in total taxes of $40,800 owed on the $100,000 excess income. 

However, if instead that $100,000 is shifted to an MSO structured as a C-corporation, it is only taxed at the 21% flat corporate rate. This means the MSO only pays $21,000 in taxes on the same $100,000. That’s a savings of $19,800 on identical income! 

Additional tax benefits unique to MSOs include the ability of individuals to deduct unreimbursed medical expenses exceeding 7.5% of income. But an MSO can establish plans to deduct all medical costs from corporate revenue at the 21% rate.

Long-term care costs can also be prepaid and deducted currently using corporate earnings in an MSO structure, whereas individuals must wait until infirmity to potentially deduct them unless they have a chronic illness. So, in practice, the MSO approach allows accelerating and optimizing long-term care deductions vs waiting indefinitely as an individual. 

Less Known Advantages 

MSOs provide other creative tax planning opportunities as well: 

Location Flexibility – MSOs allow optimizing taxes geographically by domiciling in no/low-tax states while keeping operating companies and deductible expenses in high-tax states6

Deferred Compensation – MSOs can offer deferred compensation plans as additional incentives to retain key executives and rainmakers7

How High-Net-Worth Individuals Monetize MSOs 

Housing Luxury Assets: One effective way for high-net-worth individuals to generate substantial tax savings is housing luxury assets like planes, boats, real estate, and exotic vehicles within an MSO instead of owning them outright8

The lower 21% corporate tax rate makes financing costs and operating expenses associated with luxury assets much more tax efficient than at individual rates exceeding 37%. This does not consider other factors such as import taxes, customs duty, and VAT. Additionally, luxury taxes may be imposed on certain products or services that are deemed non-essential or accessible only to the super-wealthy, such as yachts, jewelry, or real estate valued at more than $1 million. This is where good advice from a firm like STC who works with the uber wealthy can help guide you to maximize savings while enjoying the accoutrements of wealth. 

For example, consider a $50 million business jet purchased personally versus through an MSO. If owned individually, the deductible interest on a $35 million loan at 5% would be $1,750,000 annually, saving $875,000 in taxes at a 40% individual rate. 

But under an MSO, that same $1,750,000 of interest is deducted at the 21% corporate rate, generating tax savings of $402,500. That’s nearly a 50% reduction in taxes on identical interest payments. 

Similar savings apply to writing off operating expenses like hangar fees, fuel, maintenance, and employee costs at the lower corporate rate. Even with applicable passive activity and personal usage limitation rules, MSO ownership of large luxury assets pays major tax dividends. 

Strategic Employment: In addition to housing luxury assets, MSOs can provide tax benefits related to strategic employment of family members17. Family members on an MSO’s payroll essentially convert income that would be taxed at individual ordinary rates up to 37% into compensation deductible by the corporation at just 21%. 

However, reasonable salary levels must be documented based on activities performed along with qualifications. Distributions also need to align with shares owned. Failing to substantiate business purpose and fair compensation can lead to dividend treatment8. But with proper planning and sound legal advice, employing family members within an MSO structure can generate substantial tax savings. 

Managing Investments: MSOs also optimize taxes when holding partnership interests, LLCs, real estate investment trusts, and other investments9. The MSO acts as an aggregated entity through which investment income flows. 

For example, an MSO could wholly own a holding LLC that operates a portfolio of rental properties10. The net rental income to the MSO would be taxed at the 21% corporate rate instead of flowing through to individuals at higher rates. Similarly, capital gains distributions from the LLC to the MSO qualify for lower corporate rates11

MSOs also avoid self-employment taxes when acting as limited partners in investment partnerships12. compared to individuals receiving investment income directly and paying 15.3% self-employment taxes. 

Central management of scattered investment entities under one MSO umbrella allows income to be aggregated, offset, and taxed at lower corporate rates13. This is what a MSO does – it puts different things you own together under one roof. All the money they make goes into one pile, so you pay lower taxes only once on the big pile. But compliance with attribution and basis tracking rules is critical to avoid double taxation upon sale of partnership interests. 

Isolating Risky Ventures: Finally, speculative new business ventures with high liability risk can be housed within separate MSOs to shield other assets from exposure14. If the venture succeeds it can be rolled up or spun off. If it fails, losses are contained without endangering broader holdings. This structure quarantines risk while allowing further pursuit of high-upside opportunities. 

FPC Influence: Promoting Pro-Growth Tax Policy 

While this guide has focused on how individuals can utilize MSOs strategically, it is important to note that their availability results from policy advocacy by groups like the Financial Policy Council. 

The FPC actively engages with key influencers to promote legislative and regulatory frameworks that foster entrepreneurship, business investment, capital formation, and broad-based economic growth. This includes supporting the pass-through corporate structures and differential tax rates that enable implementing MSOs to achieve tax minimization. 

Specifically, the FPC through our Legacy Matters legal and accounting tax specialists monitors tax policy proposals like rate hikes from Congress and the Biden administration that would negatively impact small business owners and entrepreneurs. After monitoring economic impact evaluation, the FPC advocates against changes that would impede business expansion, hiring, and intergenerational wealth transfers. 

Conversely, the organization endorses reforms that empower entrepreneurs to grow their companies, foster prosperity, and create jobs without excessive tax burdens. By giving the small business community a voice, the FPC helps preserve access to tax reduction strategies like MSOs. 

Critical Mistakes to Avoid 

While properly structured MSOs can yield immense tax savings, there are pitfalls to avoid that can eliminate benefits: 

Failing to adequately substantiate business purpose with documented operations risks potential IRS reclassification or denial of deductions15

Not integrating expenses/activities sufficiently between entities raises risk of piercing the corporate veil in lawsuits16

Inadequate basis tracking when holding investment partnerships/LLCs can result in double taxation on disposition17

Lack of consideration for state tax implications results in missed planning opportunities18

Improper personal usage of corporate assets risks dividend treatment and loss of deductions19

The takeaway is that while highly beneficial, MSOs require expertise to establish and maintain. Their specialized nature demands strict adherence to complex tax, corporate, and regulatory requirements. It pays to get help from an experienced advisory firm like Sky Tower Council when implementing an MSO structure. 

Disclaimer: The information provided in this blog is for informational purposes only and should not be construed as legal, tax, or financial advice. The strategies and examples discussed may not be suitable for all individuals or scenarios. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Readers are advised to consult with qualified legal, tax, or financial advisors to understand how these topics might relate to their personal circumstances. The views expressed in this blog 

are those of the authors and do not necessarily reflect the official policy or position of the Financial Policy Council or any other agency, organization, employer, or company. 

Conclusion and Call to Action 

In conclusion, cleverly leveraging an MSO structure provides high-net-worth individuals and families with an effective tax minimization tool that can generate substantial savings and optimize wealth preservation. While not without risks if implemented improperly, proper establishment and maintenance of an MSO creates a tax-advantaged environment for assets, income, deductions, and investments. 

Readers with income over $400K who retain at least $200K beyond personal spending needs should strongly consider investigating an MSO further with the guidance of expert advisors. For those seeking tax efficiency akin to a Bermuda Triangle where taxes simply disappear, look no further than the MSO – a silent saver ready to retain hard-earned wealth and perpetuate prosperity. For high income earners, MSOs represent a “silent saver” that can retain wealth by reducing taxes. 

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#TaxPlanning #CapitalGainsTax #TaxDeferral #TaxSavings #TaxTips #FinancialLiteracy #HighNetWorth #CreativeTaxStrategies #TaxMinimization #TaxMitigation #CharitableTrusts 


  1. https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2022 
  2. https://www.irs.gov/newsroom/questions-and-answers-on-the-net-investment-income-tax; 
  3. https://us-tax.org/2021/07/01/all-you-need-to-know-about-the-3-8-medicare-net-investment-income-tax-how-pres-biden-will-expand-who-pays-it/;
  4. https://www.forbes.com/sites/davidrae/2021/11/09/tax-planning-tips-to-minimize-your-38-medicare-surtax/?sh=1a499cdb7295
  5. https://byrdadatto.com/banter/mso-field-guide-part-4-business-structuring-uses/ 
  6. https://www.goheencompanies.com/post/the-benefits-of-setting-up-a-management-services-organization 
  7. https://www.irs.gov/taxtopics/tc502 
  8. https://taxfoundation.org/research/all/state/remote-work-tax-reform-mobility-modernization/ 
  9. https://www.fidelity.com/viewpoints/retirement/nqdc 
  10. https://www.whitecoatinvestor.com/mso-podcast-203/ 
  11. https://www.irs.gov/newsroom/tax-treatment-for-family-members-working-in-the-family-business 
  12. https://rentprep.com/blog/legal/landlords-form-llc-2015/ 
  13. https://beforetax.co/llc-distribution-tax-rate-guide/ 
  14. https://www.mossadams.com/articles/2023/03/management-services-organization-structure 
  15. https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets 
  16. https://corporatefinanceinstitute.com/resources/management/special-purpose-vehicle-spv/ 
  17. https://www.whitecoatinvestor.com/mso-podcast-203/ 
  18. https://www.irs.gov/irm/part4/irm_04-023-005r 
  19. https://carta.com/blog/llc-taxation/ 
  20. https://www.adp.com/spark/articles/2022/06/implications-of-work-from-anywhere-when-remote-workers-cross-state-lines.aspx 
  21. https://www.taxlawforchb.com/2019/11/i-own-the-business-the-business-owns-the-assets-i-own-the-assets-right/