Tax Planning vs. Tax Preparation for MSPs: What’s the Difference?
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Prefer to read? The key ideas from the video are expanded below.
Something that confuses a lot of business owners is thinking tax preparation and tax planning are the same thing. They’re not.
Tax preparation is mostly backward-looking. For an MSP owner, it means taking what already happened during the year and reporting it correctly on a tax return. Tax planning is about thinking ahead instead of just reacting after the year is already over.
That’s where a lot of the value comes from. We sit down with clients throughout the year and talk through decisions before they happen, not just report them after the fact.
Entity Structure and S Corporation Tax Planning
Sometimes tax planning starts with relatively straightforward questions:
· Is the business operating under the right entity structure?
· Is an S corporation still the right fit?
· Is the owner paying themselves the right salary as an S corp owner?
That last one alone can save thousands of dollars.
We see business owners overpaying themselves on payroll. S corporation owners who work in the business generally need to pay themselves reasonable compensation, and those wages are subject to payroll taxes, including Social Security and Medicare taxes, which can total 15.3% between the employee and employer portions.
So if an MSP owner is paying themselves $20,000 more in wages than they reasonably need to, rather than taking that amount as an S corporation distribution, the additional payroll taxes can be about $3,000 per year. The right salary depends on the facts, but setting it correctly is a real tax-planning decision.
Home Office Tax Planning for MSP Owners
Another example is home office planning.
For S corporations, we may set up an accountable plan so the company can reimburse an owner-employee for qualifying business expenses under the tax rules. For partnerships, we may structure unreimbursed partnership expenses correctly and even help make sure the operating agreement allows for them.
For a qualifying home office, that can allow the business owner to deduct or be reimbursed for the business-use portion of expenses such as:
· rent or mortgage interest
· utilities
· insurance
· internet
· other qualifying household expenses
Usually that’s not some massive deduction you see hyped up online. But sometimes it saves a client $1,000 or more per year. Over time, those things add up.
Why Tax Advice Online Can Be Misleading
There is so much tax misinformation online right now. Some of it is blatantly wrong. Some of it is technically true but presented in a very misleading way. And some of it is accurate, but it doesn’t apply to that particular business owner’s situation.
That’s one reason we’ve created video series on overhyped tax strategies and under-the-radar tax strategies.
Tax planning is rarely about finding one magic loophole. It’s usually a bunch of smaller decisions stacking on top of each other over time.
Bonus Depreciation vs. Section 179
One example is depreciation planning.
The 2025 tax law brought back permanent 100% bonus depreciation for qualifying property acquired after January 19, 2025, under the law commonly known as the One Big Beautiful Bill Act. That can be fantastic in many situations. But there are also situations where we intentionally don’t take bonus depreciation because Section 179 gives us more flexibility.
Bonus depreciation is an additional first-year depreciation deduction for qualifying property. Section 179 is another way to expense qualifying property, but it lets us choose how much accelerated depreciation to take on an asset-by-asset basis, subject to the applicable tax rules and limits.
That flexibility matters because sometimes the goal is not to make taxable income as low as possible this year.
Why Lower Taxable Income Is Not Always Better
A lot of business owners assume, “Lower taxable income always equals better tax planning.” That’s not necessarily true.
For example, in many situations, you’re better off making roughly $100,000 per year for three years than making almost nothing for two years and then $300,000 all at once in year three.
That’s the kind of nuance most business owners never hear about.
So we may intentionally avoid driving taxable income too low because we want to use lower tax brackets, such as the 10% and 12% brackets, rather than wasting them in one year and pushing more income into higher brackets later.
The point is that good tax planning is not simply about minimizing this year’s taxable income. It is about looking at the owner’s broader situation and making decisions that may reduce taxes over time.
Tax Planning Before Selling Your MSP
Exit planning is another huge area of tax planning that people often wait too long to think about.
If an MSP owner plans to sell the business in the next few years, decisions we make today can have a significant tax impact later.
For example, if a business owner is likely to sell next year, we may not want to aggressively accelerate depreciation this year. Some of that depreciation may be recaptured later when assets are sold, potentially at a time when the owner is already recognizing substantial income from the sale.
The earlier we know the long-term goals, the better advice we can give.
Good Tax Planning Starts Before the Decision Is Made
That’s really the heart of good tax planning.
It’s not about chasing gimmicks. It’s not about finding one weird trick from TikTok. And it’s not about trying to get taxes to zero.
It’s about understanding where the business owner is today, where they’re trying to go over the next three to five years, and helping them think through decisions before they happen.
That is ultimately the difference between tax preparation and tax planning. Tax preparation reports what already happened. Tax planning looks ahead so an MSP owner can make better decisions before the tax consequences are already locked in.
This article is for educational purposes only and is not tax or legal advice. Every business is different, and you should talk with your own professional about what makes sense for your situation.
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