You can take it with you: Five tax tips before selling your business

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For many entrepreneurs who sell their businesses, minimizing the taxes on their windfall is an afterthought. Nearly half (45%) of professional advisors say their clients spend too little time on tax and wealth transfer planning, according to a recent survey by BNY Wealth.

Procrastination can come at a steep cost, according to Michael Paulus, founder of wealth advisory PCM Encore. He said he left hundreds of millions of dollars on the table when selling his first business, insurance tech firm Assurance IQ, for $2.4 billion in 2019.

"I think a lot of people think I'm good just as long as I take care of it before the deal closes. The reality is the perfect time would be two to three years before you're contemplating going to market," he told CNBC.

Paulus said selling is top of mind for many business owners as baby boomers look to retire and realize their children do not want to take the reins.

Here are five tax tips for business owners to maximize their windfall.

1. Check if you are eligible for the QSBS tax exclusion

The first step is to assess your equity. Many company founders do not realize they are eligible for a powerful tax deduction on qualified small business stock, or QSBS, according to lawyer Edward Renn of Withers.

The QSBS exemption allows investors and founders to reduce their capital gains taxes when selling stock directly acquired from a qualifying C corp. In order to claim the full exemption, the stock must be held for more than five years. Prior to the passage of the One Big Beautiful Bill Act, the maximum exemption was $10 million or 10 times the original basis of the investment, whichever is greater. OBBBA raised the exclusion to $15 million for stock issued after July 4, 2025, and allowed stockholders to claim partial tax benefits after three or four years.

The exemption has intricate requirements, including that the stock must be directly issued by the company, and many trades and services like healthcare and accounting are excluded. However, a wide range of manufacturing, retail and technology businesses qualify, according to Renn.

"If you actually make something, it's worth spending a few thousand dollars kicking the tires to figure out whether you qualify," he said.

It is possible to convert your business from a limited liability company to a C corp to qualify for the exemption. However, the five-year holding period starts from the date of the conversion, not when the LLC was formed, Paulus noted.

Brian Gray, CPA at Gursey Schneider, added that owners can get more bang for their buck by gifting QSBS to non-grantor trusts, typically done for the benefit of their children, as each taxpayer qualifies for their own deduction. For instance, an entrepreneur can "stack" $45 million in deductions by gifting QSBS to three trusts.

2. Gifting minority stakes at a discount

Thanks to OBBBA, individuals can transfer up to $15 million during life or at death without paying federal gift or estate taxes.

Business owners can make the most of this limit by gifting minority interests well before their company goes to market. Minority interests in illiquid companies are typically discounted by 20% to 35%, according to Jordana Schreiber, partner at Day Pitney.

However, it is crucial to gift these interests well in advance, according to Schreiber. Gifting or transferring shares after a sale or offering has progressed too far leaves room for the Internal Revenue Service to challenge the valuation.

"The idea is that you want to make that gift before there's any sort of offer, letter of intent, anything," she said. "You try to do this before you have any sort of sense of what the value is actually worth, and then you can use a qualified appraiser to make that determination and then leverage discounts."

Schreiber said clients typically gift equity to trusts for benefit of their children rather than directly to them in order to protect the assets from creditors or divorcing spouses.

3. Donate stock well in advance

Business owners can also jeopardize their charitable deduction on gifting appreciated stock or property if they wait too long, according to Paulus.

Donors can avoid capital gains tax on the appreciation and claim an income tax deduction by donating private shares. However, if it is done too close to the sale, the IRS may treat the transaction as a deemed sale rather than a gift. The donor is then on the hook for capital gains tax on the appreciation, Paulus said.

"Once you think that there's high likelihood of an offer, you can still donate the stock but you're going to effectively pay the tax on the sale," he said.

4. Consider relocating to a tax-friendly state.

Many clients are tempted to move to a low-tax locale like Florida or Texas before a big exit. However, changing your residency for tax purposes is far harder than just spending more than half the year in the other state, lawyers told CNBC.

Schreiber, who is based in Boston, said she reminds clients that they have to demonstrate they have a primary residence outside Massachusetts. She said that clients with homes in other states, or who like to take extended vacations, sometimes assume that since they're only going to be in Massachusetts a few months a year, their ties have been cut with the state. "That doesn't matter," Schreiber said.

Continuing to own a home or run a business in the original state makes it harder to prove to state tax authorities that you have changed your domicile, according to Schreiber.

That said, it isn't necessarily a dealbreaker but rather a challenge to overcome as state tax authorities consider a wide range of factors, she added.

This also means it takes more legwork to establish a new domicile, such as updating your driver's license, voter registration, country club affiliations and primary care doctor to your new state.

5. Choose the strategies that make sense for you.

Business owners should consider their liquidity needs before engaging in these tax maneuvers, most of which require parting with equity well before a sale, according to Brian Haloosim, president of Lido Advisors.

He said many business owners underestimate how much they will need until their advisor does the math.

"They realize their lives and their businesses were much more closely tethered together than maybe they thought before. And once the business goes away, that income that they were deriving, and also those expenses they were running through the business have to be accounted for," he said.

First-time entrepreneurs can be reluctant to engage in planning well in advance, Paulus said.

"You don't have enough money for the rest of your life, and you don't know what your business is worth. It doesn't always feel good to be like, 'I'm going to go give 35% of this to my kids,'" he said.

Paulus recommended making compromises or small steps rather than delaying altogether. For instance, a business owner can transfer some equity to a spousal lifetime access trust rather than a trust for their children's benefit, he said. Provided they stay on good terms with their spouse, they can retain indirect access to the assets and cash flow. After the spouse dies, the remainder typically goes to the children.

"Sometimes people think it's all or nothing. I always like to say it's better to not be wrong than to be right," he said. "Maybe the answer isn't 50%. Maybe you give 5% to charity and give 10% to your kids."