C Corp Exits 2025

C Corp Exits & M&A 2025

Navigating the paradox of C Corp taxation: Mitigating the "Double Tax" penalty while maximizing the "Unlimited Upside" of Section 1202.

Executive Summary

The C Corporation exit landscape is defined by a sharp divide. On one side, the "Double Tax" regime punishes asset sales with rates exceeding 50%. On the other, Section 1202 (QSBS) offers a 0% federal tax rate on stock sales, potentially saving millions.

Success in 2025 requires sophisticated architecture: using Section 338(h)(10) to bridge pricing gaps, Personal Goodwill to bypass corporate tax, and Section 1045 to rollover gains if an exit comes too early.

The Upside

Section 1202 (QSBS): 100% Federal Tax Exclusion on gains up to $10M (or 10x basis). The "Holy Grail" of tax planning.

The Friction

Double Taxation: Asset sales trigger corp tax + shareholder tax. Buyers want assets (for step-up); Sellers want stock deals.

The Trap

Assignment of Income: Donating stock after a deal is practically done (LOI signed) fails. See Estate of Hoensheid.

QSBS: The Primary Exclusion (Sec 1202)

The "100% Era"

Stock acquired after Sept 27, 2010 is eligible for a 100% federal capital gains exclusion (and 0% AMT preference).

Eligibility Checklist

  • Original Issuance: Must acquire stock directly from the company (not secondary market).
  • Gross Assets Test: Company gross assets must be ≤ $50M at all times before and immediately after issuance.
  • 5-Year Hold: Must hold stock for 5+ years. (Under 5 years? See Section 1045 Rollover).
  • Active Business: 80% of assets used in qualified trade. Excludes: Health, Law, Consulting, Finance, Hospitality.

The Cap ($10M vs 10x Basis)

The exclusion is capped at the GREATER of:

$10 Million
Standard Lifetime Cap per Issuer
10x Basis
10 times your original investment

*Strategy: "Basis Stuffing" via property contributions can increase the 10x cap significantly.

Deal Structuring & Negotiation

Buyers want Asset Sales (for depreciation write-offs). Sellers want Stock Sales (to avoid double tax). How do we bridge the gap?

Section 338(h)(10)

The Compromise: Legally a stock sale, but treated as an asset sale for tax.

  • Requirement: Target must be an S Corp or Subsidiary (Not available for standalone individuals).
  • Benefit: Buyer gets "step-up" in basis. Seller gets single layer of tax.
  • Gross-Up: Buyer often pays seller extra to cover the tax difference (Ordinary vs Capital rates).

Personal Goodwill

The Bifurcation: Founder sells their "personal relationships" directly to buyer, bypassing the corporation.

  • Result: Single tax (Capital Gains) on the goodwill portion.
  • Warning (Martin Ice Cream): Fails if you have an existing non-compete with your own company. The goodwill must truly belong to you.

Advanced Planning Strategies

Section 1045 Rollover (The Emergency Exit)

Sold before 5 years? You can defer tax by rolling proceeds into replacement QSBS within 60 days.

  • Shell Corp Strategy: Founders often start a "Newco" to hold the cash and start a new venture.
  • Risk: Newco must conduct an "Active Business" (R&D, etc.). Passive holding companies don't qualify.
Pre-Transaction Gifts (Avoid the Hoensheid Trap)

Donating stock to charity (DAF/CRT) eliminates capital gains. But timing is fatal.

The Rule: If you donate after the deal is "practically certain" (LOI signed, diligence done), the IRS taxes YOU on the gain under "Assignment of Income."

State Tax Traps (The Phantom Tax)

Non-Conformity

Federal tax might be 0% (QSBS), but states like California do NOT recognize Section 1202.
State QSBS Conformity Result
Federal Yes (100%) 0% Tax
New York Yes (Mostly) Follows Fed (mostly)
Massachusetts Yes (New!) Follows Fed
California NO Full Tax (~13.3%)

Interactive: QSBS Savings Estimator

Estimate your net proceeds and tax savings with a Section 1202 Qualified Small Business Stock exit vs. a standard exit.

Deal Economics

Impacts the 10x Cap.

E.g., CA is 13.3%.

Standard Exit (No QSBS)

$0
Total Tax Paid: $0

QSBS Exit (Sec 1202)

$0
Federal Tax: $0
State Tax: $0
Total Tax Savings
$0
Cap Applied: $10M