How to Sell Your C Corporation for $10M Tax-Free | QSBS Explained

What if you could sell your company and legally avoid paying federal capital gains tax on up to $10 million? Through Qualified Small Business Stock under IRC Section 1202, with proper planning, entity structure, and bookkeeping, this benefit is achievable.

What Is Qualified Small Business Stock (QSBS)?

QSBS refers to shares of a C corporation meeting specific IRC Section 1202 criteria. Shareholders may exclude up to $10 million or 10 times their basis in capital gains upon sale.

QSBS Fast Facts

Entity Type: Must be domestic C corporation
Stock Origin: Acquired directly from company
Holding Period: Minimum five years
Asset Limit: Less than $50 million in gross assets at issuance
Business Type: Qualified trade or business

Which Businesses Qualify for QSBS?

Not every C corporation qualifies. The IRS excludes service-based or asset-heavy industries.

Eligible Business Types:

Technology and software development
Manufacturing and industrial production
Wholesale and distribution
Research and development
E-commerce (product-based)

Ineligible Business Types:

Health, law, engineering, accounting services
Consulting and financial services
Hospitality businesses
Banking, insurance, leasing, farming
Oil, gas, mineral extraction

Key requirement: Businesses must use at least 80% of their assets in an active trade or business not on the excluded list.

The $10 Million Tax-Free Gain Rule Explained

The exclusion allows for the greater of: $10 million in capital gains per shareholder or 10x the shareholder’s original stock basis.

Example 1:

$100,000 original investment in QSBS stock
Five-year holding period
$1.2 million gain upon sale
Entire gain excluded (within $10M limit)

Example 2:

$2M gain, $150K original investment
Allows exclusion up to $1.5M under 10x basis rule

Note: Each shareholder has their own exclusion limit, so multiple owners or trusts can multiply the benefit.

5 Critical Requirements to Qualify for QSBS

Requirement 1: C Corporation Status

Must be domestic C corporation at stock issuance. LLCs, S corporations, sole proprietorships don’t qualify.

Requirement 2: Original Issuance

Stock purchased directly from company. Cannot buy from another shareholder.

Requirement 3: Active Business Operations

At least 80% assets in qualified trade or business. Passive investment/holding companies excluded.

Requirement 4: Asset Test

Corporation must have less than $50 million in gross assets before/after issuance. Includes cash, property, equipment, IP.

Requirement 5: Holding Period

Stock held minimum five years before selling. Early sales disqualify from exclusion.

Why Bookkeeping and Tax Structure Are Essential

Clean bookkeeping and strategic tax planning are required as proof for the IRS.

Proper Documentation Must Include:

Capitalization tables and shareholder ledgers
Financials showing gross assets at issuance
Records showing 80% asset usage in operations
Entity structure documentation

Mistakes That Disqualify QSBS:

Converting from LLC or S corp without new stock issuance
Failing to track asset values
Selling before five-year mark
Operating in excluded business type

EZQ Group emphasizes structured setup and ongoing compliance to protect the benefit.

When to Start Planning for QSBS

The best planning time is at the moment of incorporation or when raising capital. Retrofitting later is extremely difficult, if not impossible.

Key Planning Milestones:

During entity selection (choose C corp)
Before issuing founder or investor shares
When capital/assets below $50 million
Prior to accepting outside investment

Advantages of the QSBS Strategy

Tax-Free Exit: Up to $10M capital gains exclusion per shareholder
Investor Incentive: More appealing to outside investors
Multipliable Benefit: Families, spouses, entities claim own exclusion
Enhanced Valuation: Clean tax structure adds value

Final Thoughts: Don’t Miss This Opportunity

QSBS is one of the most powerful wealth-building tools available, but it only applies to properly structured businesses with compliant records.

EZQ Group assists by:

Forming C corporations with tax efficiency
Maintaining audit-ready bookkeeping
Monitoring QSBS compliance yearly
Strategizing profitable, tax-advantaged exits

Ready to find out if you qualify? Schedule a consultation with EZQ Group and discover whether your current structure and operations qualify for this powerful tax benefit. Proper planning could save you millions in taxes.