Founder Exit Tax Planning
Most of what decides your after-tax number is fixed months before the wire clears — at issuance, at the reorganization, at the move, at the LOI. We pressure-test that work while it can still change, and we say plainly which parts belong to your attorney.
Diligence, the LOI and signing move at the buyer’s pace. Nearly every lever worth pulling has its own deadline, and most of them close earlier.
The corporate tests for Section 1202 are measured when the stock is issued: C-corporation status, the qualified-trade-or-business test, and the gross-assets ceiling. None of it can be established retroactively. If nobody documented it then, the exclusion is reconstructed under diligence pressure rather than proven.
Non-grantor trust funding, a change of residency, and entity reorganizations all need to be real and seasoned. Done in the weeks around a signed LOI they invite exactly the scrutiny you were trying to avoid.
Stock sale against asset sale, the treatment of rollover equity, and any earnout each change the number. Once the structure is papered, the argument is over.
The Section 1045 rollover window runs 60 days from the sale date. It is short, it is statutory, and missing it is final.
We do this work alongside your existing attorney and your existing return preparer. A founder who already has stacking and trust planning in motion usually does not need a second opinion on the plan so much as a check that the documentation, the dates and the model actually support it.
The One Big Beautiful Bill Act rewrote Section 1202 for stock acquired after July 4, 2025. Older stock keeps the older rule. Founders with several rounds of issuance frequently hold both, and the two sets are tested separately.
One date, three separate changes.
For stock acquired after July 4, 2025: the exclusion becomes tiered at 50% after three years, 75% after four and 100% after five; the per-issuer cap rises to the greater of 10 times basis or $15 million; and the corporation’s gross-assets ceiling at issuance rises to $75 million.
For stock acquired on or before July 4, 2025: the holding period is more than five years for a 100% exclusion, the cap is the greater of 10 times basis or $10 million, and the gross-assets ceiling is $50 million.
The cap is measured per issuer, per taxpayer. That is the mechanism behind stacking, and it is also the reason the trust work has to be genuine.
Section 1202 also excludes whole categories of business from the start — among them financial services, hospitality and the professional services trades. That test looks at what the corporation actually does, not at how it describes itself.
More detail on the underlying definitions sits in our glossary entry for qualified small business stock.
If the five-year clock will not run in time, Section 1045 lets a non-corporate holder roll the proceeds of QSBS held more than six months into replacement QSBS and defer the gain. The holding period of the original stock tacks onto the replacement, so a founder four years in can reach five.
Replacement stock must be purchased during the 60-day period beginning on the date of sale. Not 60 days from closing conditions being met, and not from when the escrow releases.
Section 1045 applies only if elected. It is not automatic, and the documentation showing the original stock qualified has to exist.
The issuer of the replacement stock has to meet the active-business requirement for at least six months after issuance, which is a real constraint on using a newly formed entity.
Proceeds do not have to be traced dollar for dollar into the replacement stock, but the purchase does have to happen inside the window and be documented.
States are free to write their own rule, and a handful decline to follow Section 1202 at all. California is the most explicit. Revenue and Taxation Code section 18152 reads, in full: “Section 1202 of the Internal Revenue Code, relating to 50-percent exclusion for gain from certain small business stock, does not apply.”
California, Pennsylvania, Mississippi and Alabama provide no QSBS exclusion. Gain excluded in full federally is taxed in full by the state.
A4455, signed June 30, 2025, brings New Jersey into conformity for tax years beginning on or after January 1, 2026. Gain recognized in 2025 does not get it; the same gain recognized in 2026 does.
Changing domicile before a sale is a well-worn plan and a well-worn audit target. What survives is a genuine move with a documented date, not a mailing address.
California also sources income to the state for non-residents, so leaving does not by itself remove California-source gain. This is the single largest swing we see in founder exit models, and it is worth pricing before the structure is agreed rather than after.
Buyers usually prefer assets for the basis step-up; QSBS lives in the stock. Where the parties land changes your number more than any other single term.
Equity rolled into the buyer is not cash, but it can still be a taxable moment depending on how the roll is papered. It also starts a new holding period on the rolled shares.
Contingent consideration spreads gain across years at rates that may not match the year of closing, and the installment rules interact with the Section 1202 cap.
When basis is large the 10-times-basis cap can exceed the dollar cap. It is worth computing both rather than assuming the headline figure binds.
Contributing appreciated shares before a sale is agreed can change both the deduction and the gain that ever reaches you. Contributing them after the deal is effectively locked can be recast as an assignment of income, which produces the tax and the gift.
The decision turns on numbers: the deduction actually usable against your income in the year of the gift, the carryforward, the effect on the Section 1202 cap, and what the vehicle does with the shares afterwards. We model the alternatives and hand the comparison to the attorney who drafts the instrument.
Not a memo describing options. A model with your numbers in it, showing what each path leaves you and where it breaks.
Every tranche, its issuance date, its basis, which side of July 4, 2025 it falls on, and whether the corporate tests were met and documented at the time.
The federal exclusion, the state treatment where you live now, and the state treatment under any residency change you are considering, with the date each one starts to matter.
Stock against assets, rollover percentages, earnout timing, each carried through to a single after-tax figure rather than a rate.
What a buyer’s counsel will ask for that does not currently exist, in time to create it properly rather than reconstruct it.
Being specific about this is faster for everyone, and it is the honest answer to the question founders actually ask.
We do not draft trusts, deal documents or charitable instruments, and we do not give legal opinions. Your attorney does that. We build the model the drafting is based on and stay in the room while it is being drafted.
We do not issue audit or attest opinions, and we do not manage money or recommend securities. Tax work here is led by an Enrolled Agent, federally licensed to practice before the IRS, with 23 years in United States individual taxation and a background in high-net-worth and cross-border cases.
Books that survive diligence, the after-tax model, the QSBS documentation trail, and coordination across your attorney, your banker and your return preparer so the same numbers appear in all of them.
General information, not tax advice. Rates, thresholds and state conformity change; confirm current requirements for your facts before acting.
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