Businesses are “built to run” or “built for sale,” and depending on your choice, a number of planning and structuring considerations arise. This article is just a snapshot of some items you might discuss with your trusted advisors for “built for sale” businesses.
Becoming law on July 4, 2025, the One Big Beautiful Bill Act (OBBBA) made several key enhancements to the gain-exclusion benefits of qualified small business stock (QSBS). Notably, for QSBS acquired after July 4, 2025, you no longer need to hold the QSBS for at least 5 years before you can benefit from the eligible gain exclusion. OBBBA kept the 100% gain exclusion for QSBS held for at least 5 years, but if you hold QSBS for at least 3 years, you can receive a 50% gain exclusion, and if you hold it for at least 4 years, you can receive a 75% gain exclusion.
Prior to OBBBA, the per-issuer gain exclusion was capped at the greater of $10 million ($5 million for married taxpayers filing separate returns) or 10 times the aggregate adjusted basis of the QSBS stock sold. OBBBA increased the $10 million to $15 million, so now the cap is the greater of $15 million (indexed for inflation starting after 2026; half the inflation-adjusted $15 million amount for married taxpayers filing separate returns) or 10 times the aggregate adjusted basis of the QSBS stock sold.
For stock issued after July 4, 2025, to qualify as QSBS, the adjusted tax basis of the assets of the issuing corporation (that is, the fair market value of contributed assets at the time of contribution to the issuing corporation) must be no more than $75 million (now indexed for inflation starting after 2026) immediately before and immediately after the stock is issued. OBBBA had increased the contributed asset value by $25 million from the original $50 million. Note that there are other requirements for stock to qualify for QSBS treatment and additional rules with respect to the potential gain exclusion.
If you are considering selling in the relatively near future, keep in mind that although you may want capital gain treatment on your ultimate taxable gain, the buyer may be looking for a step-up in basis of the business acquired so they can benefit from depreciation and amortization deductions going forward. Some forms of tax gross-ups can account for the difference in taxes due by a seller. Due to various other factors, such as key contracts with third parties or certain regulatory licensing requirements for your business, the buyer may prefer to acquire your business’s equity rather than your corporate stock. Moreover, because many businesses are established as S corporations, buyers don’t want to acquire S corporation stock because of potential issues with a seller’s S election history. In many merger and acquisition transactions, buyers uncover problems with a seller’s S election during their pre-closing due diligence.
As a result, a buyer may require a seller to implement a pre-closing restructuring of their S corporation. An example is an “F” reorganization, which is very commonplace these days. “F” reorganizations involve certain business restructurings that are tax-free for income tax purposes and result in the seller retaining their S corporation post-closing while selling equity in a wholly owned limited liability company subsidiary of that S corporation. In other words, for legal purposes, the buyer purchases equity in the limited liability company, which is treated as an asset sale for income tax purposes by the S corporation.
Uncovering problems with a seller’s S election can delay the transaction, result in holdbacks and escrows, and, in some cases, blow the deal. The costs of addressing such issues during a transaction can also be expensive, and the cost will likely come out of the deal proceeds. Addressing any potential S election issues pre-transaction may ultimately save the seller significant money and even make the seller more attractive to a potential buyer. Even if no S election issues exist, engaging in such restructuring before you go to market may be reason enough to make your business more attractive to potential buyers.
Finally, if you are considering that sale and haven’t yet updated your estate plan to incorporate it, you should do so well ahead of the potential transaction, not after the closing. Favorable business valuations and properly designed and funded trusts can save estate taxes, shield assets from creditors, and provide access for family members.
Gathering a team of trusted advisors ready to move forward with you will benefit you in the long run, whether you plan to hold the business for the long term or sell. If OBBBA shows anything, the law shifts – so please reach out to your trusted advisors to see how you may be impacted.
Milan D. Slak, Esq., LL.M. is an attorney and Member of Norris McLaughlin, P.A. in its Allentown office. He focuses his practice on complex business transactions including mergers and acquisitions, leveraged buyouts, joint ventures, and recapitalizations. He has been the lead attorney or lead tax and structuring attorney on numerous M&A transactions.
