Beating Taxes When Selling Your Business: What Benjamin Franklin Didn’t Know Can Help You

How Combining Qualified Small Business Stock with an Employee Stock Ownership Plan Transaction Can Reduce or Completely Eliminate Federal Income Tax on a Liquidity Event

By Eric Bardwell, Esq. and Jeremy Huish JD, CPA¹

When Benjamin Franklin famously proclaimed that "in this world nothing can be said to be certain, except death and taxes," he did not contemplate the availability of Employee Stock Ownership Plans and Qualified Small Business Stock.

While it is true that when a business owner sells a company over one-third of the proceeds from the sale may never make it to his bank account, for many business owners this tax can be avoided with proper planning. There are two often overlooked Internal Revenue Code provisions that could defer and potentially eliminate the owner’s long-term capital gain tax on the sales proceeds. Structuring a business to take advantage of these provisions often takes some advanced planning, but the extra effort is typically well worth the taxpayer’s time. Those two tax provisions are the Section² 1042 election for companies selling to an Employee Stock Ownership Plan ("ESOP"), and Qualified Small Business Stock under Section 1202.