The Role of Tax Planning in M&A: Understanding QSBS

Why Qualified Small Business Stock (QSBS) Deserves a Seat at the Deal Table

In most mergers and acquisitions conversations, valuation and enterprise value capture the majority of the attention. Buyers evaluate price and growth potential, and sellers focus on maximizing proceeds. Alongside both of them, advisors spend significant time negotiating terms and structure.

Tax strategy often enters the conversation later than it should.

In this episode of The Transaction Abstract Podcast, Redpath partner Joe Hellman sits down with Ashlyn Gray, a Tax Senior Manager in Redpath’s Transaction Advisory Services practice. The practice specializes in assisting businesses, owners, and investors in navigating the complexities of M&A across a wide range of industries and deal sizes.

Today’s conversation explores Qualified Small Business Stock (QSBS) and why it can play a meaningful role in transaction outcomes. As Ashlyn shares, “On the tax side, we help our clients reframe viewing tax as a compliance requirement and more as a value lever in these transactions.” From early-stage considerations through closing, that change in mindset can be powerful.

For founders, investors, and operators preparing for a potential exit, QSBS can represent one of the most valuable tax opportunities available under U.S. tax law. This includes both tax savings and tax deferral for buyers and sellers alike. Here’s the upside of QSBS and how to approach this strategy through multiple lenses.

What is Qualified Small Business Stock (QSBS) and What Does It Mean for Owners?

Qualified Small Business Stock refers to stock issued by certain domestic C corporations that meet the requirements outlined in Section 1202 of the Internal Revenue Code. If those requirements are satisfied, shareholders may be eligible to exclude a substantial portion of the capital gains realized when the stock is sold.

Ashlyn shares, “QSBS offers one of the most valuable tax breaks for private company owners.” Why is that? Current rules allow qualifying shareholders to exclude up to 100 percent of capital gains, subject to limits such as the greater of $15 million or ten times the shareholder’s basis in the stock. In simplest terms, QSBS provides a unique opportunity for business owners to exit while paying little to no tax.

For founders and investors who have built value over many years, this provision can materially influence the net outcome of a transaction. While price and enterprise value often drive headlines, thoughtful tax planning around QSBS can shape what owners ultimately retain after closing.

Who Qualifies for QSBS Eligibility

Although the benefit can be significant, QSBS eligibility depends on several key factors. First, the shareholder must receive the stock directly from the issuing company, rather than purchasing it from another party on a secondary market. Second, the shareholder must satisfy a holding period requirement. Historically, five years of ownership qualify for the full exclusion, while more recent provisions introduce partial gain exclusions after 3- or 4-year holding periods on certain shares issued after July 2025.

Structure is also critical. To qualify for QSBS treatment, the issuing company must remain a qualified small business during substantially all of the holding period for the shareholder. Additionally, the shareholder needs to be a non-corporate taxpayer, for example, individuals, trusts, pass-through entities like partnerships or S Corporations.

Why QSBS Matters for Both Buyers and Sellers

QSBS planning can influence decisions on both sides of a transaction. From the buy side, it creates an opportunity to think ahead. As the value of a business grows, buyers can begin planning for a future exit and consider how to structure ownership in ways that reduce potential tax exposure on gains. With early planning, an acquisition or restructuring can position the company so that future stock may qualify under QSBS Section 1202, creating meaningful tax advantages over time.

For sellers, QSBS can shape exit planning and transaction structure, particularly when comparing stock and asset sales. In situations where the rules apply, the tax savings may significantly reduce capital gains exposure and influence how a deal ultimately comes together. As noted during the conversation, “If the business owner is able to exit without having to pay taxes, that's a pretty good reason to consider this.”

The Role of Entity Structure and Timing in QSBS Planning

Entity choice often plays a central role in QSBS planning. Many companies begin as LLCs or other pass-through entities because of their flexibility during early growth stages. While those structures can make sense initially, they may limit QSBS eligibility unless the company transitions to a C corporation.

In certain cases, businesses can convert through a check-the-box election, allowing newly issued stock to begin the holding period required for QSBS qualification. Because the holding period requirement typically spans several years, owners considering a future sale should evaluate entity structure well in advance of a transaction.

We shared earlier that qualifying for QSBS requires being set up as a Qualified Small Business. What does it mean to be a Qualified Small Business:

• Entity Structure: The company must be organized as a domestic C corporation.
• Gross Asset Limits: Prior to July 2025, the company’s adjusted basis of aggregate gross assets must not exceed $50 million at the time the stock is issued and immediately afterward. Under the updated rules effective after July 2025 through the OBBBA, that threshold increases to $75 million. For a startup, this value may initially align with the corporation’s enterprise value, but as the company matures, this generally equates to the tax basis of cash and property held by the corporation.
• Active Business Requirement: At least 80 percent of the company’s assets must be used in an active trade or business, rather than held primarily for investment purposes.

Federal and State QSBS Considerations

QSBS benefits originate in federal tax law, but state-level treatment can vary. Some states follow federal rules and allow similar exclusions at the state level. Others do not conform, which means shareholders may still owe state taxes even when federal capital gains are excluded. Understanding where the company operates and where shareholders reside is important for overall tax planning.

Planning Ahead Creates Opportunity

A consistent takeaway from the conversation is the value of early coordination among tax, financial, and legal advisors. When tax strategy is considered several years before a potential transaction, business owners have greater flexibility to align entity structure, ownership, and exit planning with long-term goals. Qualified Small Business Stock provides a strong example of how thoughtful planning can transform a technical tax provision into a meaningful financial advantage for buyers and sellers alike.

Listen to the full episode of The Transaction Abstract Podcast to hear Joe Hellman and Ashlyn Gray discuss Qualified Small Business Stock, tax planning in M&A, and how early strategy can help protect the value created in a business over time.

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