Promote ​​enterprise? The Trump tax legislation provides homeowners higher choices for cashing out

An exit sign is seen above US President Donald Trump as he speaks to reporters aboard Air Force One.

Saul Loeb | Afp | Getty Images

Are you thinking about selling your small business in a few years? The One Big Beautiful Bill Act could give you millions more.

President Donald Trump’s signature law, which went into effect in July, significantly expanded the benefits of qualified small business shares, meaning Now more companies have the option to convert to a C corporation to receive more favorable tax treatment. While this is likely a boon for recently launched AI startups that see their own exit strategies as a path to great riches, owners in many sectors of the economy can reap significant tax savings by considering a business sale in the coming years.

Of course, there are requirements for who qualifies, and navigating the QSBS planning process can be complicated. But for many small businesses currently considering an exit strategy, it’s worth exploring. According to a recent report from the Exit Planning Institute, older business owners are the most likely to consider selling. 58% of baby boomers say they plan to sell their business in the next five years. That compares to 39% of Generation X and 48% of Millennials, 2023 data shows. But regardless of age, data shows that exit planning is a top priority for all generations of entrepreneurs.

First, the basics. The new law increases the cap on tax-free gains for qualified C-corp companies issuing stock after July 4 to $15 million from the previous threshold of $10 million. Additionally, the holding period for shares will be shortened from five years to three years, creating partial tax benefits for owners who sell after three or four years. This is important because it means that companies that are interested in selling before the five-year period but previously thought that QSBS was not an option could reconsider their strategy. Additionally, more small businesses are eligible as the asset cap has been increased from $50 million to $75 million – potentially making the option applicable to businesses that have not been eligible in the past. The law also provides for inflation adjustments.

Here are some more details on what small businesses need to know about how beneficial changes to the QSBS rules could make them more money if they decide to sell.

The tax calculation for S-Corporations and C-Corporations changes and can run into the millions

To qualify, companies must be incorporated as a C corporation. Many companies know very little about their corporate structure, but it can make a big difference for tax purposes. Therefore, understanding their structure is a crucial first step.

Before the Tax Cuts and Jobs Act and the One Big Beautiful Bill Act, it wasn’t attractive for small businesses to be C-corps, and many still aren’t organized that way, said Corey Pederson, wealth strategist at Crewe Advisors in Salt Lake City.

Rather, many opted for sole proprietorships or partnerships, which, with the exception of limited partners, are responsible for self-employment and personal taxes. According to the Small Business Administration, many companies also choose to be an S corporation, a special type of corporation designed to avoid the double tax penalty of a regular C corporation. S-corps allow profits and some losses to be passed through directly to the owners’ personal income without being subject to corporate tax rates. This type of incorporation became even more popular after tax law changes in 2017 allowed more companies to qualify for greater tax savings.

Now, however, more companies may have additional incentive to become a C corporation. “This widens the net for those who should be thinking about QSBS,” said Brian Gray, a partner at accounting firm Gursey Schneider in Los Angeles.

Owners can sell faster than the previous law allowed

U.S. taxpayers typically must pay federal capital gains taxes when they sell their company shares for a profit. But qualified small business stock offers significant federal tax benefits to entrepreneurs, startup founders, early employees and investors because they can exclude or defer capital gains taxes when selling qualified stock. With proper planning, the savings can be combined with other estate planning strategies for even greater tax savings, Gray said.

Many small businesses considering selling within a few years can receive millions in QSBS-related tax benefits by converting to a C corporation. These include domestic technology, manufacturing, wholesale and retail companies. In the past, owners had to hold the shares for five years to benefit from the tax benefits. However, the new law provides for a phased approach. After five years, shareholders receive 100% of the tax benefit. After four years they can get 75% of the benefit, after three years they can get 50%, which could make it more attractive to many owners, Gray said.

The disadvantage is double taxation

The main tax disadvantage of a C corporation is double taxation. This means that corporate profits are taxed at the company level and then taxed again when they are distributed as dividends to shareholders. However, there are ways to get around the problem of double taxation, so it makes sense to talk to a tax professional, Pederson said.

If you’ve been a small business owner for 10 to 20 years, chances are good that you have personal savings. Instead of taking profits out of the business, keep them in the business and use your personal savings for expenses, Pederson said. “If you don’t receive the distributions from the corporation, you don’t pay double tax,” he said, adding, “That doesn’t work if you don’t have enough savings to cover your expenses.”

According to the U.S. Census Bureau, as of 2023, there were two million small businesses—those with 500 employees or fewer—that were formally organized as corps. Many of these companies may benefit from additional savings as a result of the new tax law. According to the Exit Planning Institute, older business owners need to think carefully about the opportunity, especially given that 27% of boomer business owners say they are unprepared when it comes to formal valuation plans and 9% are unprepared when it comes to their estate plans.

And even if they’ve considered converting to a C corporation before and rejected the idea, it’s worth another look, said Natalie Whelton, senior wealth advisor and wealth strategist at HB Wealth in Atlanta, especially since the additional $25 million in headroom opens the door for more companies to convert to a C corporation, she added.