By Jeff McClean
After years of long hours, missed weekends, and all the risks that come with building something of value, you’ve finally reached the point where selling your business is on the table. That’s a big deal. For many founders and entrepreneurs, it’s one of the most significant financial moments of their lives—and one of the most personal.
You only sell once. And when the numbers start getting real, so do the consequences. One of the biggest and most overlooked is taxes.
You don’t need to be talked into how much that matters. You’ve worked too hard to let poor planning erode the outcome. The good news is, with the right preparation and the right people around you, there are ways to keep more of what you’ve built.
Here are some of the most effective ways we’ve seen business owners reduce their tax bill when it’s time to sell.
Qualified Small Business Stock (QSBS)
One of the least understood yet powerful tax planning tools for founders is something called Qualified Small Business Stock, or QSBS. Section 1202 of the Internal Revenue Code (IRC) provides for amount exclusions up to $10 million, or 10 times your basis, if your business meets these qualifications:
- You’re the original shareholder of a domestic C-Corp.
- When stock was issued, the assets of the business were under $50M.
- You run an active trade or business (can’t be passive).
- Your business is a qualified business – think tech or software. Professional service businesses (law, accounting, financial) don’t qualify.
- You have held your stock for five or more years.
The opportunity to save on taxes can be significant. You can also use a practice called “trust stacking” that can extend the benefits to other family members, but expert legal tax counsel is important.
Several years ago, a client of ours was able to maximize QSBS planning for their family even though they had yet to meet the five-year holding period requirement. He reserved at least $10 million of QSBS-eligible stock for himself and his wife, established a separate QSBS qualified trust for each of his four children, and established a Donor-Advised Fund to receive 10% of their stock holdings to support their charitable intentions.
As a result of this planning, the client has been able to shelter $50M of the proceeds as QSBS qualified stock, which results in over $14M of income tax savings (note: not all states allow for QSBS exclusion for state income taxes). And the charitable deduction from his contribution to a Donor-Advised Fund would further reduce his tax bill on the proceeds over his $10M QSBS exemption.
Using Trusts to Eliminate State Taxes
No income tax states, such as Delaware and Nevada, have long been utilized to reduce state income taxes, better safeguard assets, and gain estate planning benefits. If you transfer your business interests to non-grantor trusts in those states, you can mitigate state income taxes.
However, deploying this step in selling your business requires doing so well in advance of your sale, at least two or three years. This can divert extra scrutiny from other high-income tax states. Also, Intentionally Defective Grantor Trusts (IDGTs) can freeze your business value to prevent your estate from appreciating for estate tax purposes.
Charitable Giving to Offset Capital Gains
Philanthropy is a generous gesture, but it can also be an effective tax-saving strategy. There are a few structures to accomplish this:
- Donor-advised funds (DAFs): By donating appreciated shares before a sale, you avoid capital gains tax and receive an immediate income tax deduction. The funds can be granted to charities over time, providing you with flexibility and a lasting impact.
- Charitable remainder trusts (CRTs): These allow you to convert appreciated stock into a lifetime income stream. You get a partial deduction up front, defer the capital gains, and the remainder goes to charity after the trust term ends.
- Private foundations: For families seeking more involvement and control, a foundation provides a long-term platform for structured giving. While more complex and expensive to maintain, it can support multi-generational philanthropic efforts.
Installment Sales
An installment sale allows owners to receive staggered payments over several years, thereby limiting annual tax exposure. Employee Stock Ownership Plan (ESOP) sales may support deferrals in capital gains, given that the proceeds are reinvested in qualified entities. They’re worth investigating for selling your business.
Asset Sales vs. Stock Sales
In an asset sale, the buyer acquires specific assets of the company, including inventory, equipment, intellectual property, and goodwill. However, the seller typically faces double taxation—once at the corporate level and again when the stockholders receive the proceeds. Stock sales are taxed at more favorable capital gains rates, so they’re more tax-efficient.
Build the Right Team for Selling Your Business
Selling a business isn’t something you do alone. Between the legal, tax, and financial considerations, it takes a coordinated team—an M&A attorney, a CPA, a valuation expert, and others who understand the process from every angle.
A wealth advisor plays a central role in tying it all together. At Solidarity Wealth, we often help clients bring the right people to the table and make sure everyone is aligned around what matters most to them and their family.
If you’re considering selling, even if it’s a few years away, it’s worth starting the conversation early. Feel free to reach out to us at info@solidaritywealth.com or call 385-374-1665. We’re happy to talk through what the road ahead might look like.
About Jeff
For over a dozen years, Jeff McClean has advised some of the country’s most successful families on all aspects of their wealth. With his background as a former tax and estate planning attorney at a prominent Houston, Texas, law firm, Jeff has advised clients through business sales, funding rounds, IPOs, complex tax and wealth planning transactions, private and public market investments, executive compensation packages, succession planning, and much more. In short, Jeff helps clients navigate the unique challenges that come with building wealth and helps them better predict their financial future.
In addition to co-founding Solidarity Wealth, Jeff advises single-family offices on a broad array of challenges. He also serves as the Managing Partner of Solidarity Capital, an income fund managed separately by the Solidarity partners.
Jeff is a sought-after thought leader on a wide range of tax, finance, and estate planning topics. Jeff has appeared on CNBC, Bloomberg, and Fox Business, has been quoted in Barron’s, Kiplinger’s, and Yahoo!Finance, has published in diverse publications from Silicon Slopes Magazine to the Taxation of Exempts Journal by Thomson Reuters, and spoken to endless professional groups and large company conferences.
Jeff holds a bachelor’s degree in accounting from Brigham Young University – Idaho and a Juris Doctor, with honors, from the University of Texas School of Law. Outside of work, Jeff is married and the father of three amazing children. He has also served as past president of the Salt Lake Estate Planning Council.
Solidarity Wealth is a registered investment adviser. This material is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Solidarity Wealth and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Solidarity Wealth unless a client service agreement is in place.
