As a small business owner, you’ve learned to navigate the ebbs and flows of a constantly shifting economic landscape. Planning an exit in this environment might be the biggest challenge yet.
Interest rates fluctuate, financing conditions tighten and loosen, and buyer appetite shifts from one quarter to the next—you can’t control any of that. What we can control is how prepared you are when your exit arrives. That process should start today, even if you’re not thinking about selling yet.
The most successful players in the M&A space prepare well in advance because they know that an early start can turn an exit from something that happens to you into something you can help shape.
Tax planning is a key part of that process. Qualified Small Business Stock (QSBS) is a key element of exit planning. When utilized early and correctly, it can be the difference between keeping millions of dollars in sale proceeds and surrendering a large share of them to taxes.
What do QSBS exclusions actually do for founders and shareholders?
QSBS exclusions provide a substantial benefit under Internal Revenue Code (IRC) Section 1202. If used strategically, QSBS allows the original shareholder of a corporation to exclude up to 100% of their capital gain when they sell the business.
A “capital gain” does not equate to “total sale price.” Here’s an example of the concept that’s up-to-date with current IRS rules on the topic:
If your basis in the company is $30 million and you sell for $50 million, the capital gain is $20 million. For stock issued after July 4, 2025, shareholders who own QSBS can exclude the greater of $15 million or ten times their basis from capital gains taxes. That’s per issuer.
Those are the broad strokes of the QSBS exclusion, but taking advantage of it is another story. Taking advantage of QSBS exclusions effectively requires planning well in advance. We can’t just decide to take the exclusion the day of the sale.
Let’s examine the planning process and exclusions in more detail.
Holding periods make timing a critical element in QSBS strategies.
For most of its history, Section 1202 required a full five-year hold before excluding any gain, an all-or-nothing approach. Thankfully, Congress replaced the old rule with a tiered schedule for stock issued after July 4, 2025, when It passed the One Big Beautiful Bill Act (OBBBA). Here’s what that looks like now:
| Holding period | Gain excluded |
| At least 3 years | 50% |
| At least 4 years | 75% |
| 5 years or more | 100% |
So, a 100% exclusion still belongs to owners who reach five years. And the portion of the gain you do not exclude at three or four years is generally taxed at a 28% federal rate, higher than the usual long-term capital gains rates, with additional tax possible on top of that.
Pause to reflect on this scenario for a moment.
To receive the 100% capital gains tax exclusion, QSBS must be issued five years before your exit date. You can’t just bolt QSBS onto a transaction at the last minute.
The clock starts when the qualifying stock is issued, which means the structure has to be in place long before a buyer ever appears; this is a strong argument for founders to be proactive in their long-term business strategies.
Ideally, exit planning should begin at the inception of the business. If you wait until the time you’re actually ready to exit, it’s too late. Unfortunately, we see this situation far too often. That’s why we push for founders to get set up with our team as early as possible.
Does your business qualify?
The cleanest fit for QSBS is a domestic C corp. A Limited Liability Company (LLC) taxed as a C corp is also eligible.
For LLCs, eligibility depends on the type of ownership you hold in the LLC. Is it a membership interest or a stock interest? That’s what we have to look at, because QSBS applies exclusively to a stock interest.
Roughly 43% of small businesses in the United States are LLCs. In Texas, that number is 68% to 70%, making it by far the most popular business structure in the state. LLCs receive tax advantages like pass-through income and one level of taxation, but tax savings may diminish as LLCs grow. Reforming as a C corp is a viable option. We’d need to take a look at your business before pointing you in one direction or another.
Many professional service businesses are excluded under Section 1202.
It is also worth mentioning that Section 1202 excludes a long list of service businesses, including law, accounting, consulting, health, and financial and brokerage services.
Section 1202 also excludes any business whose principal asset is the skill or reputation of its people. Incorporated product and technology companies, manufacturers, and wholesalers tend to be a good fit.
Note: The dollar figures and effective dates for Section 1202 have changed recently and are now indexed for inflation. Current numbers and acquisition dates should always be confirmed for your specific shares and timeline. You can check the IRS website for the most recent data or contact my office to see where your company currently stands.
Founders see big benefits.
Founders should pay close attention to the details. Strip away the code’s sections, and QSBS is really a strategy designed to reward the person or persons who did the building.
If you’re a founder, QSBS will put more money in your pocket through the exclusion when it’s time to exit.
I’ve met many founders who arrive at the negotiating table thinking, “I’ll just take whatever’s left.” QSBS turns that posture around. Starting early becomes an imperative if the goal is to maximize business valuation and reduce the founder’s tax liability on the sale date.
Business entity restructuring is an option, not a shortcut.
There are pros and cons to a C corp, which is precisely why a CPA within your M&A team has to weigh QSBS against your entire picture and exit plan rather than chase the exclusion in isolation.
If you’re an architect building a house, you build doorways to get in and out. It’s the same with owning a business. Your business is either going to sell or fail. An exit is coming either way.
To execute QSBS exclusion strategies successfully, you need a team, and you need time.
Getting QSBS exclusions in place takes cross-disciplinary expertise.
Teams must include a CPA, tax advisor, and an attorney to handle the formation documents and operating agreement. A wealth manager should also be part of the early conversations.
Going back to the example of the $50 million sale, a wealth manager in our network could structure the $20 million capital gain so that a large portion is tax-deferred. Of course, that might not be necessary if the full QSBS exclusion is granted. Discuss that with our team. That’s what we’re here for.
A business exit is a process that requires a long-term M&A advisory relationship.
A firm that shows up at closing is limited to negotiating a price. High-impact outcomes require a partner who has been in the room for years, combining CFO-level financial analysis, M&A advisory, tax planning, and specialized guidance from trusted professionals in our network. We’d like to be that partner. To get started, schedule a discovery call.
Nguyen D. Nguyen, CPA
Tax Manager
The Novyx Group
