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 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 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.