How to Sell Your C Corporation for $10 Million Tax-Free

Selling a business is a major milestone. But what if you could sell your company and legally avoid paying federal capital gains tax on up to $10 million? That’s the promise of Qualified Small Business Stock (QSBS) under IRC Section 1202. With the right planning, entity structure, and meticulous bookkeeping, this opportunity can be fully within reach.

In this article, we’ll explain how QSBS works, what kinds of businesses qualify, and the steps you need to take now to benefit from this rare but powerful tax exclusion.

What Is Qualified Small Business Stock (QSBS)?

Qualified Small Business Stock refers to shares of a C corporation that meet specific criteria outlined in Section 1202 of the Internal Revenue Code. When the requirements are satisfied, shareholders may exclude up to $10 million or 10 times their basis in capital gains from federal taxes upon sale.

QSBS Fast Facts:

• Entity Type: Must be a domestic C corporation
• Stock Origin: Acquired directly from the company (not second-hand)
• Holding Period: Minimum of five years
• Asset Limit: Company must have $50 million or less in gross assets at issuance
• Business Type: Must be engaged in a qualified trade or business (more on this below)

Which Businesses Qualify for QSBS?

Not every C corporation will qualify. The IRS excludes certain industries that are service-based or asset-heavy. Understanding whether your business falls into a qualified category is essential before planning your exit strategy.

Eligible Business Types:

• Technology and software development firms
• Manufacturing and industrial production
• Wholesale and distribution companies
• Research and development enterprises
• E-commerce (product-based, not service-based)

Ineligible Business Types:

• Health, law, engineering, and accounting services
• Consulting and financial services
• Hospitality businesses (hotels, restaurants)
• Banking, insurance, leasing, and farming
• Oil, gas, and mineral extraction operations

Important: Businesses must use at least 80% of their assets in an active trade or business that is not on the ineligible list above.

The $10 Million Tax-Free Gain Rule Explained

The QSBS exclusion allows for the greater of:

• $10 million in capital gains per shareholder, or
• 10x the shareholder's original stock basis

Example:

• You invest $100,000 in original QSBS-eligible stock
• After five years, the business is sold, and your gain is $1.2 million
• You exclude the entire gain (up to $10 million)

If your gain was $2 million and your original investment was $150,000, you could exclude up to $1.5 million under the 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

Before claiming this exclusion, you must meet all five of the following criteria:

1. C Corporation Status

• Business must be structured as a domestic C corporation at the time the stock is issued
• LLCs, S corporations, and sole proprietorships do not qualify

2. Original Issuance

• Stock must be purchased directly from the company
• You cannot buy shares from another shareholder and qualify

3. Active Business Operations

• At least 80% of assets must be used in a qualified trade or business
• Passive investment companies or holding companies are excluded

4. Asset Test

• The corporation must have less than $50 million in gross assets immediately before and after stock issuance
• Includes cash, property, equipment, and intellectual property

5. Holding Period

• Stock must be held for at least five years before selling
• Early sales disqualify you from claiming the exclusion

Why Bookkeeping and Tax Structure Are Essential

It is not enough to simply form a C corp and hope for the best. The IRS requires proof of every qualifying factor. That’s where clean bookkeeping and strategic tax planning come in.

Proper Documentation Must Include:

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

Mistakes That Disqualify QSBS:

• Converting from an LLC or S corp without issuing new stock
• Failing to track asset values at issuance
• Selling before the 5-year mark
• Operating in an excluded business type without realizing it

At EZQ Group, we emphasize structured setup and ongoing compliance to protect this benefit for our clients.

When to Start Planning for QSBS

The best time to plan for QSBS eligibility is at the moment of incorporation or when raising capital. Retrofitting a business to qualify later is extremely difficult, if not impossible.

Key Planning Milestones:

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

Advantages of the QSBS Strategy

When structured properly, QSBS offers multiple layers of benefit:

• Tax-Free Exit: Up to $10M in capital gains exclusion per shareholder
• Investor Incentive: More appealing to outside investors
• Multipliable Benefit: Family trusts, spouses, and entities may each claim their own exclusion
• Enhanced Valuation: Clean tax structure adds value to potential acquirers

Final Thoughts: Don’t Miss This Opportunity

The QSBS exclusion is one of the most powerful wealth-building tools available to entrepreneurs, but it only applies to those who structure their business correctly and maintain compliant books.

At EZQ Group, we help clients:

• Form C corporations with tax efficiency in mind
• Maintain audit-ready bookkeeping
• Monitor compliance with QSBS eligibility year over year
• Strategize for profitable, tax-advantaged exits

Take Action Today

If your goal is to build and eventually sell your business, planning for QSBS now can save you millions in taxes later. Contact EZQ Group to schedule a consultation and find out whether your current structure and operations qualify.