Changes to QSBS and potential impact on deal structure?

July 08, 2025

by an investor from University of Delaware in Boca Raton, FL, USA

Given the changes to Qualified Small Business Stock rules under the “Big Beautiful Bill” (please see below), does anyone have thoughts on or has anyone modeled out whether it is now more efficient to structure acquired businesses as a C-Corp instead of the more traditional LLC? You would have to pay taxes on generated profits under the C-Corp but if it is a possible exit some time between years 3-5 you would get the benefit of some significant tax breaks on the actual sale. I am curious if anyone has modeled out the breakeven points in terms of profitability and timing of exit where it now becomes better to be a C-Corp. Thank you. Key QSBS Enhancements in OBBBA (effective July 4, 2025) 1. Reduced Holding Period (Tiered Exclusion) o 3 years →  50% gain exclusion o 4 years →  75% exclusion o 5+ years →  100% exclusion (as before) en.wikipedia.org+12frostbrowntodd.com+12lewisrice.com+12bipc.com+4gibsondunn.com+4mintz.com

Reply by a searcher
from Stanford University in Healdsburg, CA 95448, USA

We used 100% QSB qualified funds when we closed our acquisition in 2019 and I did a deep dive into 1202 QSB regulations as both deal counsel and the operating partner of the acquiring entity. The result was we basically pocketed $3.5m that otherwise would have evaporated into taxes. With the higher cap and tiered exclusion periods it's even more compelling now. There are ways to structure an asset acquisition that still qualifies: Form a C corp and contribute capital into it in return for stock; that C corp can then acquire assets and the stockholder retains the benefits of the QSB classification. Happy to go into it in more detail if anyone is interested, but suffice it to say that there's almost no reason not to take advantage of Sec 1202 QSB treatment if the target business qualifies. The impact could be around $4.75m on $15m of capital that the investor simply gets to keep.

Reply by an intermediary
from The Johns Hopkins University in Gainesville, FL, USA

My base model already includes an evaluation of the loss of NPV for a stock sale versus an asset sale, useful during the purchase process. It also includes a 10 year operating ProForma, with the ability to customize the growth rates of every accounting category. I have not yet added in the new QSBS rules, but other responders on this thread are correct in that customized modeling will be required. The ultimate NPV and IRR will be highly dependent upon the owners' tax rates and the company policies regarding the distribution of profits. For example, C-corp profits can be distributed each year as additional owner salary, avoiding corporate income taxes but potentially increasing payroll taxes. Discount rates also play a large role in estimating NPV. Bottom line: work with a competent financial modeler and tax advisor to make the determination on corporate structure.

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