Selling a business presents a rare opportunity to optimize tax outcomes through proactive planning. A range of strategies, from foundational to highly advanced, can mitigate capital gains, defer income, or leverage favorable exclusions. The recent changes under the One Big Beautiful Bill Act of 2025 make it especially important to revisit Qualified Small Business Stock (QSBS) related strategies.
Installment Sales
Installment sales allow sellers to defer gain recognition across multiple years by receiving payments over time. This often reduces exposure to higher marginal tax brackets and the 3.8% Net Investment Income Tax. In addition to smoothing tax liability, sellers may benefit from interest income and increased deal flexibility.
Two-Year Related-Party Installment Sales
Selling to a related party (often a trust) and delaying resale for two years allows gain deferral and facilitates family wealth transfers. Strict compliance is required to avoid triggering immediate tax under IRC rules.
Section 1202 – QSBS Exclusion
Section 1202 permits partial or full exclusion of capital gain on the sale of QSBS. The 2025 OBBBA significantly expanded these benefits for stock acquired after July 4, 2025.
Key Enhancements
- Tiered Exclusion by Holding Period
- 3 to 4 years: 50% exclusion
- 4 to 5 years: 75% exclusion
- Over 5 years: 100% exclusion
- Increased Lifetime Cap
- Raised to $15 million per issuer or 10× basis, indexed beginning in 2026
- Expanded Qualification Threshold
- Gross asset limit raised to $75 million
- No AMT Preference Item
- Tiered exclusions are not considered AMT preference items
Legacy QSBS rules remain applicable for stock acquired before July 4, 2025. Core requirements such as original issue, C corporation status, 80% active business use, and exclusion of certain service businesses remain in place.
Section 1045 – QSBS Rollover
If QSBS is sold before meeting the holding period, gain can be deferred by reinvesting in new QSBS within 60 days. The deferred gain reduces the basis of the replacement stock.
Section 1244 – Ordinary Loss Treatment
Section 1244 allows qualifying small business stock losses to be treated as ordinary rather than capital losses. This treatment is capped at $50,000 ($100,000 for joint filers) annually. The issuing corporation must have raised $1 million or less in capital at the time of issuance, and stock must have been issued in exchange for money or property.
Sales to ING Trusts
Transferring ownership to an ING trust in a no-tax state can eliminate or defer state income tax. The trust must be non-grantor for income tax and incomplete for gift tax. Proper legal structuring is essential.
Charitable Remainder Trusts (CRTs)
A CRT can sell a business interest tax-free and pay the donor income over time. This provides tax deferral, a charitable deduction, and potential estate tax benefits. The trust must meet specific technical requirements and be funded before sale.
Stock vs. Asset Sale Considerations
The choice between selling stock or assets significantly affects tax treatment and deal structure.
- Stock Sales (Generally Favorable to Sellers):
- Treated as capital gains
- Entity-level continuity simplifies transfer of contracts, licenses, and employees
- Avoids corporate-level tax for C corporations
- Asset Sales (Generally Favorable to Buyers):
- Step-up in basis for depreciable assets
- Ability to select specific assets and liabilities
- Accelerated depreciation under bonus or Section 179 expensing rules
For C corporations, asset sales can trigger double taxation at both the corporate and shareholder levels. S corporations may avoid this if the built-in gains period has expired. Buyers often prefer asset purchases for liability protection and tax basis advantages, which may reduce the overall value to the seller unless offset in negotiations.
Post-OBBBA Planning Considerations
The expanded QSBS rules create new planning opportunities:
- Earlier exits with partial exclusions.
- More companies qualify due to asset threshold increases.
- Higher caps and AMT relief broaden strategy use.
Advisors should explore multi-strategy planning and ensure proper documentation to preserve tax benefits.
Conclusion
With thoughtful, early planning and the strategic use of updated QSBS provisions, trust structures, and installment mechanisms, sellers can significantly improve after-tax outcomes from a business sale.
Sources
- Public Law 119-21, One Big Beautiful Bill Act of 2025
- Foley & Lardner LLP, “Updates to Qualified Small Business Stock Rules Under Section 1202”
- Michael Best & Friedrich LLP, “Section 1202 Exclusion Expansion Under OBBBA”
- McGuireWoods LLP, “Expanded Tax Benefit Opportunities for QSBS Investors”
- WilmerHale, “One Big Beautiful Bill Act — Income Exclusion for Qualified Small Business Stock”
- Crowell & Moring LLP, “OBBBA: Changes to QSBS Under Section 1202”
- Internal Revenue Code §§ 453(e), 1202, 1045, 1244, 664
