Client Profile
| Industry | Manufacturing (Precision Machining) |
| Sale Price | $6,000,000 |
| Entity Type | C-Corporation |
| State | Wisconsin |
| Key Metric | Stock held > 5 years, original issuance |
| Gain Excluded | $5,660,000 |
The Problem
This business owner had built a precision machining company over 18 years and received a $6 million acquisition offer. The owner's adjusted basis in the C-Corp stock was approximately $340,000. Without planning, the sale would generate a $5.66 million capital gain with a tax bill exceeding $1.34 million.
The buyer's initial offer was an asset purchase, which would have created double taxation approaching $2 million. The prior advisor had not discussed QSBS eligibility or stock sale structuring.
AE Tax Advisors Strategy
1. QSBS Exclusion Under IRC §1202
We confirmed the C-Corp stock qualified for the QSBS exclusion under IRC §1202. All requirements were met: originally issued stock, qualified small business with gross assets under $50 million, active qualified trade or business (manufacturing), and stock held for more than 5 years. Under IRC §1202(a)(1), the 100% gain exclusion applied, with the $5.66 million gain falling well within the $10 million cap.
2. Stock Sale Negotiation Under IRC §338(h)(10)
We negotiated a stock sale structured under IRC §338(h)(10), giving the buyer asset-sale tax benefits while preserving stock sale treatment for the seller, critical for QSBS eligibility.
3. Purchase Price Allocation Under IRC §1060
We optimized the purchase price allocation under IRC §1060 among the seven asset classes, satisfying both parties.
Before & After Comparison
| Scenario | Tax Owed |
|---|---|
| Asset Sale (No Planning) | ~$2,000,000 (double tax) |
| Stock Sale (No QSBS) | $1,347,000 |
| Stock Sale with QSBS Exclusion (AE Tax Advisors Strategy) | $0 (federal) |
Key Takeaways
- IRC §1202 QSBS exclusion can eliminate 100% of federal capital gains tax on the sale of qualified C-Corp stock held more than 5 years.
- The transaction must be structured as a stock sale (not an asset sale) for QSBS treatment, a 338(h)(10) election can give the buyer asset-sale benefits while preserving stock sale treatment for the seller.
- QSBS eligibility must be confirmed at issuance, throughout the holding period, and at sale, multiple requirements must be met and documented.
- Business owners contemplating a future exit should evaluate C-Corp election and QSBS planning years in advance.