Business to sell? Trump tax law offers owners better way to cash out

Thinking about selling your small business in a few years? The One Big Beautiful Bill Act could mean millions more in your pocket.

President Donald Trump’s signature legislation, enacted in July, has significantly expanded the benefits of qualified small business stock, shares in an eligible small business that are subject to special capital gains tax rules. More businesses are now eligible to convert to a C corp to qualify for favorable tax treatment. While this is likely to be a boon to recently minted AI startups that see a path to big riches in their own exit strategies, owners across many sectors of the economy can reap significant tax savings if they are contemplating a business sale in the coming years.

To be sure, there are conditions to who qualifies, and navigating the QSBS planning process can be complicated. But for many small businesses currently thinking about an exit strategy, it’s worth investigating. According to a recently released report by the Exit Planning Institute, older business owners are the most likely to be contemplating a sale, with 58% of boomers saying they plan to sell their business in the next five years. That compares with 39% of Gen X and 48% of millennials, the data from 2023 show. But regardless of age, the data shows that exit planning is cited as a top priority among all generations of entrepreneurs.

First, the basics. The new law raises the tax-free gain cap to $15 million for qualifying C corp businesses that issue stock after July 4 from the previous threshold of $10 million. It also lowers the holding period for the stock to three years from five years, adding partial tax benefits for owners who sell after three or four years. This is important because it means businesses that are interested in selling sooner than five years, but who previously thought QSBS wasn’t an option, could rethink their strategy. Additionally, more small businesses are eligible, with the asset cap lifted to $75 million from $50 million — which could also make the option applicable to businesses who weren’t eligible in the past. The law also institutes inflation adjustments.

Here’s some more details behind what small businesses need to know about how favorable changes to QSBS rules could put more money in their pockets if and when they decide to sell.

S corp vs. C corp tax math is changing, and can add up to millions

Businesses have to be set up as a C corp to qualify. Many businesses know very little about their corporate structure, but it can make a big difference for tax purposes, so understanding their structure is a critical first step. 

Advertisement

Before the Tax Cuts and Jobs Act and the One Big Beautiful Bill Act, it wasn’t attractive for small businesses to be C corps, and many still aren’t organized this way, said Corey Pederson, wealth strategist at Crewe Advisors in Salt Lake City. 

Rather, many chose to be sole proprietorships or partnerships, which, except for limited partners, are responsible for self-employment and personal taxes. Many businesses also opt to be an S corp, a special type of corporation designed to avoid the double taxation drawback of regular C corps, according to the Small Business Administration. S corps allow profits, and some losses, to be passed through directly to owners’ personal income without being subject to corporate tax rates. This type of incorporation became even more popular after the 2017 tax law changes which allowed more business to qualify for greater tax savings.

Now, however, more businesses may have an additional incentive to become a C corp. “This broadens the net for who should be thinking about QSBS,” said Brian Gray, partner at accounting firm Gursey Schneider in Los Angeles.

Owners can sell more quickly than previous law allowed

U.S. taxpayers typically have to pay federal capital gains taxes when they sell their company stock for a gain. But qualified small business stock shares offer significant federal tax benefits to entrepreneurs, startup founders, early employees and investors by allowing them to exclude or defer capital gains tax upon the sale of qualifying stock. With proper planning, the savings can be combined with other estate planning strategies to offer even more significant tax savings, Gray said.

Many small businesses that are considering selling within a few years may reap millions in QSBS-related tax benefits by converting to a C corp. This includes domestic technology, manufacturing, wholesale and retail companies. In the past, owners had to hold the stock for five years to reap the tax benefit, but the new law creates a tiered approach. At five years, stock holders get 100% of the tax benefit. At four years, they can receive 75% of the benefit, and at three years, they can receive 50%, which could make it more appealing to many owners, Gray said. 

Double taxation is the downside 

The primary tax disadvantage of a C corp is double taxation. This means that corporate profits are taxed at the corporate level and then taxed again when distributed to shareholders as dividends. However, there can be ways around the double taxation issue, so it makes sense to talk to a tax professional, Pederson said.

If you’ve been a small business owner for 10 to 20 years, odds are good that you have personal savings. Instead of drawing profit from the business, keep it in the corporation and use your personal savings for expenses, Pederson said. “If you’re not taking the distributions from the corporation, you’re not paying the double tax,” he said, adding “that doesn’t work if you don’t have enough savings to cover your expenses.”

There were two million small businesses — those with 500 employees or less — officially organized as corps in 2023, according to U.S. Census Bureau data. Many of these businesses may be able to benefit from additional savings under the new tax law. Older business owners need to give the possibility careful thought, especially in light of the fact that 27% of boomer entrepreneurs say they are unprepared in terms of formal valuation plans and 9% are unprepared with their estate plans, according to the Exit Planning Institute.

And even if they’ve thought about converting to a C corp before and dismissed the idea, it’s worth another look, said Natalie Whelton, senior wealth advisor and wealth strategist at HB Wealth in Atlanta, especially since the $25 million extra wiggle room opens the door for additional businesses to convert to a C corp, she added.