For business owners, the cost of inaction can be staggering. Meet a 58-year-old privately held business owner of a thriving technology services company with 22 employees. Like many business owners, he was unaware of the tremendous financial risk he had, as he was losing millions of dollars each year to inefficient tax structures. Over five years, his failure to act would have cost him over $10.5 million.
By leveraging an MSO (Managed Service Organization) structure and a Cash Balance Plan, this privately held business owner turned things around, unlocking millions in tax savings and positioning his business for a legacy of wealth and security. After 5 years of these strategies the business owner sold his business and was able to live comfortably in retirement. Here’s how it worked and why waiting even one more year could have been disastrous.
The Cost and Consequence of Inaction
The cost of inaction of not implementing an MSO and a cash balance plan could create a $10.5 million loss, as shown below. This loss is driven by taxes paid in a pass-through entity taxed at the top marginal rate of 37% instead of using an MSO structure, which benefits from a corporate tax rate of 21%. Tax savings represent cash returned to the business, available to grow and protect the company. With an 8% ROI on retained cash, the opportunity cost of not utilizing these savings is significant. Additionally, the $300,000 annual Cash Balance Plan contribution is 100% deductible on the personal tax return (1040), and the growth accrues in the plan at an 8% ROI.
|
Year |
Tax Savings Missed (Inaction) |
Lost Growth on Tax Savings (Inaction) |
Cash Balance Plan Lost Growth (Inaction) |
Total Financial Impact of Inaction |
|
1 |
$1,325,000 |
$106,000 |
$24,000 |
$1,455,000 |
|
2 |
$2,650,000 |
$228,480 |
$57,920 |
$2,936,400 |
|
3 |
$3,975,000 |
$358,758 |
$110,554 |
$4,444,312 |
|
4 |
$5,300,000 |
$496,659 |
$172,998 |
$5,969,657 |
|
5 |
$6,625,000 |
$642,392 |
$246,530 |
$7,513,922 |
|
Grand Total |
$6,625,000 |
$1,832,289 |
$611,902 |
$10,569,191 |
This chart illustrates the full impact of inaction, reflecting both lost growth on tax savings reinvested at 8% annually and lost Cash Balance Plan growth.
What are MSOs and Cash Balance plans?
A Management Service Organization (MSO) is a business structure designed to handle operational services, such as management, marketing, and administrative tasks, for a business. It enables owners to transfer income from their operating company to the MSO, where income can be taxed at 21% corporate rates instead of 37% individual rates, creating tax-efficient strategies for reducing their personal and corporate tax burdens.
A Cash Balance Plan is a type of defined benefit retirement plan that combines high contribution limits with predictable, tax-deferred growth. It’s an excellent tool for privately held business owners who want to save aggressively for retirement while maximizing tax deductions.
Federal Taxes Saved with MSO and Cash Balance Plan
Implementing an MSO structure and Cash Balance Plan can reduce personal and corporate tax liability dramatically. This chart breaks down the tax savings achieved with these strategies in a single tax year
| Item | 2024 Taxes (Actual) | 2024 Taxes with MSO | 2024 Taxes with MSO and Cash Balance Plan |
| Wages | $500,000 | $500,000 | $500,000 |
| Business Income (K-1) | $6,000,000 | $500,000 (see note) | $500,000 (see note) |
| Management Fee | $5,000,000 | $5,000,000 | |
| Other MSO Expenses | $500,000 (W-2 wages deducted here) | $500,000 (W-2 wages deducted here) | |
| Additional Deductible MSO Expenses (20%) | $1,000,000 | $1,000,000 | |
| Total Personal Income to be Taxed | $6,500,000 | $1,000,000 | $700,000 |
| Tax on Personal Return | $2,200,000 | $440,000 | $140,000 |
| Cash Balance Plan Deduction | $300,000 | ||
| MSO Taxable Income | $3,500,000 | $3,500,000 | |
| Corporate Tax Rate @ 21% | $735,000 | $735,000 | |
| Total Tax | $2,200,000 | $1,175,000 | $875,000 |
| Total Tax Savings on 1040 Only | $1,760,000 | $2,060,000 | |
| Total Savings with MSO | $1,025,000 | $1,325,000 | |
| % Tax Savings | 46.6% | 60.2% |
Combined Wealth Accumulation: Tax Savings and Cash Balance Plan Growth Over 5 Years
By reinvesting tax savings and contributing to a Cash Balance Plan, this business owner created significant long-term financial growth. This chart illustrates how these components work together to build wealth over five years
|
Year |
Tax Savings |
Tax Savings Growth @ 8% |
CBP Principle Contribution |
CBP Growth @ 8% |
Total Combined Savings with Growth |
|
1 |
$1,325,000 |
$106,000 |
$300,000 |
$24,000 |
$1,755,000 |
|
2 |
$1,325,000 |
$228,480 |
$300,000 |
$57,920 |
$1,911,400 |
|
3 |
$1,325,000 |
$358,758 |
$300,000 |
$110,554 |
$2,094,312 |
|
4 |
$1,325,000 |
$496,659 |
$300,000 |
$172,998 |
$2,294,657 |
|
5 |
$1,325,000 |
$642,392 |
$300,000 |
$246,530 |
$2,513,922 |
|
Grand Total |
$6,625,000 |
$1,832,289 |
$1,500,000 |
$611,902 |
$10,569,191 |
Conclusion: A Strategy for Wealth, Savings, and Legacy
Post-Sale Transition: Leveraging the MSO for Generational Wealth
After selling his operating company in year 5, the privately held business owner retains the MSO to:
- Manage Real Estate, Private Investments, and Private Business Investments: The MSO becomes a tool for investment management, ensuring efficiency and reduced personal tax exposure.
- Generational Wealth Transfer: The MSO is placed into a trust, with a step-up in basis at death, minimizing capital gains for heirs.
- Asset Protection and Continuity: The MSO ensures a smooth transition of wealth while retaining control over the owner’s estate
By identifying and acting on inefficiencies in his tax structure, this privately held business owner:
- Saved over $10.5 million in combined tax savings and growth over five years.
- Accumulated $1.5 million in Cash Balance Plan contributions and over $611,902 in growth.
- Positioned his MSO as a vehicle for managing real estate, private investments, and private business investments, while ensuring a legacy through generational wealth planning.
This case highlights the importance of proactive tax strategies and legacy planning for business owners looking to maximize wealth and secure their financial future.
Disclosures: This example is for illustrative purposes only and does not constitute a recommendation of any specific strategy or investment. Guardian does not practice tax or legal advice. We collaborate with independent attorneys and tax advisors to support our clients. Past results are not indicative of future outcomes. Please consult your financial advisor and tax professional before implementing any strategy. This approach may not be suitable for every business; a detailed analysis and feasibility study should be completed prior to implementation.
Resources: Learn More About Cash Balance Plans
- Cash Balance Plans – IRS Overview:
https://www.irs.gov/retirement-plans/cash-balance-plans - FAQs on Defined Benefit Plans – IRS:
https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-defined-benefit-plans - The Rise of the Cash Balance Pension Plan: https://www.journalofaccountancy.com/issues/2023/jan/rise-of-the-cash-balance-pension-plan.html
- 5 Key Benefits of Cash Balance Plans: https://www.thetaxadviser.com/issues/2018/sep/5-key-benefits-cash-balance-plans.html
- Data Shows Popularity of Cash Balance Plans: https://www.plansponsor.com/data-shows-popularity-cash-balance-plans/
- Cash Balance Pension Plans: A Complete Guide: https://www.octoberthree.com/articles/cash-balance-pension-plans-a-complete-guide/
- Cash Balance Plans: A Small-Business Owner’s Best Friend: https://www.forbes.com/councils/forbesbusinesscouncil/2022/11/28/cash-balance-plans-a-small-business-owners-best-friend/
- Guardian’s Proprietary MSO Program to Save Taxes and Protect Assets for Business Owners and Privately Held Companies: https://guardiantaxconsultants.com/blog/guardians-proprietary-mso-program-to-save-taxes-and-protect-assets-for-business-owners-and-privately-held-companies/
- 100 Insurance Uses MSO: https://guardiantaxconsultants.com/blog/100-insurance-uses-mso/
- How the 2025 Election May Reshape Tax Savings for Passthroughs, C-Corporations, and Management Service Organizations: https://guardiantaxconsultants.com/blog/how-the-2025-election-may-reshape-tax-savings-for-passthroughs-c-corporations-and-management-service-organizations/
- Maximizing Tax Savings with Management Service Organizations (MSOs): https://guardiantaxconsultants.com/blog/maximizing-tax-savings-with-management-service-organizations-msos/
- Unlock Tax Savings and Asset Protection: How a Management Services Organization (MSO) Can Transform Your Small Business: https://guardiantaxconsultants.com/blog/unlock-tax-savings-and-asset-protection-how-a-management-services-organization-mso-can-transform-your-small-business/
- Tax and Fee Considerations for the MSO-PC Structure: This article discusses the tax implications and considerations for Management Service Organizations and Professional Corporation structures. https://www.mossadams.com/articles/2023/03/management-services-organization-structure
- Management Service Organizations and Unrelated Business Income Tax: This blog post examines how MSOs interact with Unrelated Business Income Tax regulations. https://nonprofitlawblog.com/management-service-organization-and-unrelated-business-income-tax/
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