Financial advisors highlight overlooked tax benefit of OBBBA

There is a big, beautiful tax break in the One Big Beautiful Bill Act (OBBBA) that business owners – and their financial advisors - better not miss.

The OBBBA has made Section 1202 of the Internal Revenue Code an even more valuable tax break than many small business owners and investors realize, according to wealth managers. Section 1202 of the tax code allows qualifying owners to exclude up to $15 million per shareholder from capital gains tax when they sell their C-corporation, potentially saving seven figures or more. Key modifications of the provision include reduced holding periods for partial tax exclusions and an increased target size threshold for qualifying businesses.

Brad Bruce, founder and private wealth strategist at mFORCE Capital, a Sanctuary Wealth partner firm, discusses Section 1202 with nearly every client who owns or is starting a business that could qualify, especially if they're in industries like technology, manufacturing, or retail, which align with the qualified small business stock (QSBS) eligibility. In Bruce’s opinion, it should be a standard part of any tax planning conversation, even if a sale isn't imminent because eligibility requires proactive structuring.

“I typically emphasize it in three key stages: formation of the new business, making sure it's structured as a C Corp and meets QSBS requirements; mid-term planning in the three-to-five-year period, where we review stock issuance and ownership and confirm eligibility; and pre-sale, one to two years out, where we validate that the stock qualifies and model the tax savings to optimize the sale structure,” Bruce said.

Similarly, Joy Torrealba, investment advisor at Jackson Square Capital, believes the topic should be addressed “early and often.”

“Shares are only eligible until a business reaches a certain size, previously $50 million max in gross assets and now after the updates under OBBBA up to $75 million in gross assets. Once the opportunity is missed — there is no getting it back,” Torrealba said.

Common exclusion misconceptions
 

There are some common misconceptions or obstacles keeping owners from taking advantage of this exclusion. And they may want to rethink them in the wake of the OBBBA changes.

For example, many owners assume QSBS is limited to Silicon Valley-type businesses, even though it applies to a wide range of C Corps in various industries. Some owners simply shy away because they believe the rules are too complicated.

“Others worry that converting to a C Corp will increase their tax burden due to double taxation. Obstacles include incorrect entity structure, missed holding periods, and, really, a general lack of awareness of asset thresholds and incomplete documentation,” Bruce said, adding that he helps overcome these fears by educating clients early and modeling tax savings with the help of their CPAs.

Torrealba said many people she encounters simply don't know this provision exists, while others don't realize the exemption is available per individual, per company. Furthermore, she points out that it's also not just for business owners.

“We see people receive stock distributions from PE funds that qualify for the QSBS exemption. It's something that should be communicated by the PE firm, but it also falls on the advisors and clients to ask the right questions. If someone doesn't meet the five-year holding period to claim the QSBS exemption, they can do a section 1045 rollover into QSBS at another company to defer the gain and 'tack' the old holding period onto the new position,” Torealba said.

Finally, advisors say collaboration with the client’s professional team is also essential in maximizing 1202 benefits. Bruce said he acts as the “quarterback” with regular check-ins and meetings with the professional team and clients.

Torrealba agrees, saying it’s the job of the advisor to keep planning and implementation on track.

“For something like a GRAT, there is at least a two-year annuity period to consider. The main parties in most planning will be the company's legal counsel and the client's Trust and Estate attorney. In many instances, a private valuation will need to be done as well, separate from the 409A. The CPA is mainly involved on the reporting side of things, but should of course be kept in the loop the entire time,” Torrealba said.