Understanding the Impact of the One Big Beautiful Bill Act on Small Business Owners
An exit sign is seen above U.S. President Donald Trump as speaks with reporters aboard Air Force One.
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Thinking about selling your small business in a few years? The One Big Beautiful Bill Act could mean millions more in your pocket. President Donald Trump’s signature legislation, enacted in July, has significantly expanded the benefits of qualified small business stock, shares in an eligible small business that are subject to special capital gains tax rules. More businesses are now eligible to convert to a C corp to qualify for favorable tax treatment.
To be sure, there are conditions to who qualifies, and navigating the QSBS planning process can be complicated. But for many small businesses currently thinking about an exit strategy, it’s worth investigating. According to a recently released report by the Exit Planning Institute, older business owners are the most likely to be contemplating a sale, with 58% of boomers saying they plan to sell their business in the next five years. That compares with 39% of Gen X and 48% of millennials, the data from 2023 show.
Key Changes to Qualified Small Business Stock Rules
The new law raises the tax-free gain cap to $15 million for qualifying C corp businesses that issue stock after July 4 from the previous threshold of $10 million. It also lowers the holding period for the stock to three years from five years, adding partial tax benefits for owners who sell after three or four years. This is important because it means businesses that are interested in selling sooner than five years, but who previously thought QSBS wasn’t an option, could rethink their strategy. Additionally, more small businesses are eligible, with the asset cap lifted to $75 million from $50 million — which could also make the option applicable to businesses who weren’t eligible in the past.
Many small businesses that are considering selling within a few years may reap millions in QSBS-related tax benefits by converting to a C corp. This includes domestic technology, manufacturing, wholesale and retail companies. In the past, owners had to hold the stock for five years to reap the tax benefit, but the new law creates a tiered approach. At five years, stock holders get 100% of the tax benefit. At four years, they can receive 75% of the benefit, and at three years, they can receive 50%, which could make it more appealing to many owners.
S Corp vs. C Corp Tax Math and Double Taxation
Businesses have to be set up as a C corp to qualify. Many businesses know very little about their corporate structure, but it can make a big difference for tax purposes, so understanding their structure is a critical first step. Before the Tax Cuts and Jobs Act and the One Big Beautiful Bill Act, it wasn’t attractive for small businesses to be C corps, and many still aren’t organized this way. Rather, many chose to be sole proprietorships or partnerships, which, except for limited partners, are responsible for self-employment and personal taxes.
The primary tax disadvantage of a C corp is double taxation. This means that corporate profits are taxed at the corporate level and then taxed again when distributed to shareholders as dividends. However, there can be ways around the double taxation issue, so it makes sense to talk to a tax professional. If you’ve been a small business owner for 10 to 20 years, odds are good that you have personal savings. Instead of drawing profit from the business, keep it in the corporation and use your personal savings for expenses.
Conclusion and Next Steps
There were two million small businesses — those with 500 employees or less — officially organized as corps in 2023, according to U.S. Census Bureau data. Many of these businesses may be able to benefit from additional savings under the new tax law. Older business owners need to give the possibility careful thought, especially in light of the fact that 27% of boomer entrepreneurs say they are unprepared in terms of formal valuation plans and 9% are unprepared with their estate plans, according to the Exit Planning Institute. For more information on how the One Big Beautiful Bill Act could impact your business, visit Here
Smart Tip for Readers
If you’re considering selling your small business in the next few years, it’s essential to consult with a tax professional to determine the best corporate structure for your business and to understand how the new tax law could impact your exit strategy. By taking the time to understand the qualified small business stock rules and how they apply to your business, you could potentially save millions in taxes when you sell your business.
