How Founders Can Reduce Taxes When Selling a Company

This article is general tax education. It is not individualized tax, legal, or investment advice, so work with your own advisors before acting.

The tax outcome of a company sale is mostly decided before the deal process starts. Entity type, how long the stock has been held, and how the purchase price is paid set the range, and the negotiation only moves things inside it. Sam Prentice builds that pre-sale architecture for founders, then coordinates with their CPA and attorney through the deal.

Why does exit tax planning start years before the sale?

Because the largest breaks have holding-period clocks: five years for the full QSBS exclusion, and more than one year for basic long-term treatment. The long-term threshold comes from IRS Topic 409, and the QSBS tiers run three to five years. A founder who first asks the tax question after a letter of intent has already given up the levers with the biggest ranges.

Waiting also narrows structural options. Moving equity, revising the entity, or issuing new stock all take time to be respected for tax purposes, and some steps lose their value once a sale is imminent. The planning conversation belongs years out, not weeks out.

What is the QSBS exclusion worth on a sale?

For qualifying stock acquired after September 27, 2010 and held more than five years, Section 1202 excludes 100 percent of the gain, capped at the greater of $10 million or 10 times basis. The stock must be originally issued by a domestic C corporation whose gross assets stayed at or under $50 million through issuance, with at least 80 percent of assets used in an active qualified business, under Section 1202. Certain service businesses are excluded from qualifying.

Any gain above the excluded amount does not fall back to the ordinary brackets quietly: the taxable part of a QSBS gain is taxed at a maximum 28 percent rate, per Topic 409. Modeling the capped and uncapped layers is exactly the kind of arithmetic to run before pricing a deal.

What changed for QSBS under the 2025 law?

Three numbers moved for stock acquired after July 4, 2025: exclusions now start at a three-year hold, the cap rose to $15 million, and the issuer asset limit rose to $75 million. The new tiers exclude 50 percent of gain at three years, 75 percent at four, and 100 percent at five, with the caps indexed for inflation starting in 2027, according to The Tax Adviser.

Older stock keeps the older rules, so a founder can hold two vintages of stock with different caps and clocks at the same time. Tracking acquisition dates per share block becomes part of the exit file.

What if the exit comes before the five-year hold?

Section 1045 offers a rollover: gain on QSBS held more than six months can be deferred by buying replacement QSBS within the 60-day window after the sale, under Section 1045. The holding periods can then be combined toward the exclusion on the replacement stock.

The window is short and the qualification tests still apply to the new issuer, so this is a move to line up before closing rather than discover afterward. It shows up most in acquisitions of young companies where the founders reinvest in their next venture.

Asset sale or stock sale: which is better for the seller?

Sellers usually come out ahead in a stock sale, which produces a single capital gain on the shares. Buyers often push for an asset purchase instead, because it resets their depreciation. An asset sale can also route part of the price through items taxed at ordinary rates, which is why the structure question is negotiated alongside the price rather than after it.

The gap between the two structures is real money, and it belongs in the deal model from the first offer. This is a place where the tax strategist, the CPA, and the deal attorney have to run the numbers together rather than in sequence.

How do installment sales spread the tax on an exit?

When part of the price is paid over time, gain is generally recognized as the payments arrive under Section 453, with the mechanics detailed in IRS Publication 537. Seller notes and earnouts usually ride this rule, which spreads the gain across payment years instead of stacking it into the closing year.

Spreading is not automatically better. Electing out and paying tax up front can win when rates are expected to rise or when the note carries collection risk, so the choice is a projection exercise, not a default. The broader menu of gain tools sits in the companion guide to reducing capital gains taxes.

How does Sam Prentice work with founders before a sale?

Sam Prentice builds the exit plan as deliverables with names and dates: a tax strategy blueprint and an entity structure review, designed around the founder's timeline and executed with their CPA and attorney. Wage-side planning for the years before the exit is its own track, covered in the guide to offsetting W-2 income. For founders who qualify, the Private Client Engagement runs this as a year-long program rather than a one-off consult.

On timing, Sam Prentice tells founders the ideal is to plan in the first quarter for the December of the following year. Waiting still leaves room: "Oftentimes people delay it until September through December, in which case you can still do 80% of your tax strategy." The cost of waiting is fewer moves that have time to work.

If a sale is on your horizon, even a distant one, book a discovery call and start the clock working for you instead of against you.

Frequently asked questions

How much gain can QSBS exclude when I sell my company?

For qualifying C corporation stock acquired after September 27, 2010 and held more than five years, Section 1202 can exclude 100 percent of the gain, capped at the greater of $10 million or 10 times basis. Stock issued after July 4, 2025 uses a $15 million cap with partial exclusions starting at a three-year hold.

What did the 2025 tax law change about QSBS?

For stock acquired after July 4, 2025, the law added tiered exclusions of 50 percent at three years, 75 percent at four years, and 100 percent at five years, raised the per-issuer cap to $15 million, and lifted the issuer gross-asset limit to $75 million, both indexed for inflation starting in 2027.

My company is an LLC or S corporation. Can I still get QSBS?

Not on existing equity. QSBS must be stock originally issued by a domestic C corporation. Some owners restructure years ahead of a sale so newly issued C corporation stock can start its own holding period, which is a decision to model with a CPA and attorney long before a deal is on the table.

Do earnout payments get taxed all at once?

Generally no. Contingent and deferred payments are usually reported as they are received under the installment method of Section 453, which spreads the gain across the payment years. The seller can also elect out and recognize everything up front when that produces a better result.

Does Sam Prentice replace my CPA or M&A attorney during a sale?

No. Sam Prentice designs the exit tax strategy, then works alongside the client's own CPA and attorney to implement it. Deliverables such as a tax strategy blueprint and an entity structure review are built with, not instead of, the existing financial team.

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Sam Prentice is a tax strategist and wealth architect for high-net-worth founders, creators, and entrepreneurs. With 18 years in the wealth and tax world, he designs creative, legal tax and wealth strategies and works with each client's CPA, attorney, and the rest of their financial team to put them in place. Connect with him on LinkedIn or follow him on Instagram.