Selling a Business in 2026: LLC vs S Corp vs C Corp Exit Tax Strategy Under OBBBA
Quick Answer
When selling a business in 2026, your entity structure dramatically impacts after-tax proceeds: LLCs and S Corps benefit from pass-through taxation with a single layer of tax (plus the permanent 20% QBI deduction under OBBBA), while C Corps face double taxation on asset sales—but may qualify for the QSBS Section 1202 exclusion of up to $10 million in capital gains. The OBBBA’s permanent QBI deduction, increased SALT cap ($40K), and enhanced bonus depreciation create new planning opportunities that can save sellers hundreds of thousands of dollars with the right pre-sale structuring.
Key Takeaways
- Entity structure can swing your tax bill by 20–40% on the same sale price. LLCs and S Corps generally produce the lowest overall tax burden for business sales under $10 million, while C Corps with QSBS eligibility can eliminate federal capital gains tax entirely on sales up to $10 million.
- OBBBA made the 20% QBI deduction permanent in 2026, directly reducing the tax savings from pass-through entity sales by lowering the ordinary income rate applied to a portion of sale proceeds.
- Asset sales vs. stock sales matter enormously: Buyers prefer asset sales for step-up in basis, but sellers of C Corp stock face only one layer of tax. The deal structure often matters more than the entity itself.
- Depreciation recapture (Section 1245 and 1250) can convert what appears to be capital gains into ordinary income at sale, significantly increasing the tax cost for asset-heavy businesses.
- Pre-sale entity restructuring—such as F-reorganizations, late S Corp elections, or contributing assets to a new holding company—can legitimately reduce taxes but must be executed well before a binding sale agreement to withstand IRS scrutiny.
- The 2026 OBBBA SALT cap increase to $40,000 (with inflation adjustments) provides additional breathing room for high-income sellers in high-tax states to offset state-level capital gains.
How OBBBA Changed the Business Sale Tax Landscape in 2026
The One Big Beautiful Bill Act (OBBBA), signed into law in late 2025 and effective for tax year 2026, fundamentally reshaped several provisions that directly affect business sale tax planning. Understanding these changes is essential for any business owner contemplating a sale in the second half of 2026 or beyond.
Permanent QBI Deduction: A Double-Edged Sword for Sellers
The most significant OBBBA change for business sellers is the permanent extension of the 20% Qualified Business Income (QBI) deduction under Section 199A. Previously set to sunset after 2025, the deduction is now a permanent fixture of the tax code—but it interacts with business sales in nuanced ways.
When you sell business assets, the QBI deduction applies to the ordinary income portion of the gain (primarily depreciation recapture under Section 1245 and inventory). However, capital gains from the sale of intangible assets—goodwill, customer lists, trademarks—do not qualify for the QBI deduction. This distinction matters because:
- For an LLC selling assets, the portion allocated to equipment and inventory may still receive the 20% QBI deduction, effectively reducing the federal rate on that portion from 37% to 29.6%.
- Capital gains allocated to goodwill remain taxed at the long-term capital gains rate of 20% (plus 3.8% NIIT), without QBI benefit.
- For S Corp shareholders, the same logic applies, but the reasonable compensation requirement may further complicate allocation.
For a deeper understanding of how OBBBA affects pass-through entities generally, see our comprehensive guide on OBBBA pass-through entity tax changes for 2026.
Enhanced SALT Cap: $40,000 With Inflation Adjustments
The OBBBA raised the State and Local Tax (SALT) deduction cap from $10,000 to $40,000 for 2026, with annual inflation adjustments beginning in 2027. For business sellers in high-tax states like California, New York, or New Jersey, this change provides meaningful relief:
- A seller realizing $2 million in capital gains may face state taxes of $200,000+ in high-tax jurisdictions.
- Under the old $10,000 SALT cap, most of that state tax was nondeductible for federal purposes.
- With the $40,000 cap, sellers can offset a larger portion of their federal taxable income, reducing the effective combined federal-state rate on the sale.
This change is particularly relevant for LLC and S Corp sellers, whose business sale gains flow through to their personal returns where the SALT cap applies. C Corp sellers don’t benefit personally because the corporate-level tax doesn’t interact with the individual SALT cap.
Bonus Depreciation and Asset Sale Planning
OBBBA restored 100% bonus depreciation for qualified property placed in service in 2026, with phasedown scheduled to begin in 2027. While this primarily benefits buyers of business assets (who receive an immediate write-off of purchased equipment), it also influences seller negotiations:
- Buyers are more willing to allocate purchase price to tangible personal property (eligible for bonus depreciation) rather than goodwill (amortized over 15 years).
- This increased buyer preference for asset allocation can benefit sellers of LLCs and S Corps, as more proceeds may be classified as Section 1245 gain eligible for the QBI deduction.
- Sellers who recently purchased equipment and claimed bonus depreciation will face larger Section 1245 recapture amounts, increasing their ordinary income exposure at sale.
Permanent Estate Tax Exemption
The OBBBA made the $15 million per-person estate tax exemption permanent (inflation-adjusted from the 2026 baseline), up from the previous scheduled reduction to approximately $7 million. For business sellers planning their estate, this creates significant opportunities:
- Business owners can gift shares of an LLC or S Corp to family members before a sale, shifting the capital gains tax burden to family members in lower brackets.
- With the higher exemption, more of the business value can be transferred gift-tax-free before the sale closes.
- This planning is particularly powerful for family businesses structured as pass-through entities, where income shifting through ownership transfers is relatively straightforward.
Asset Sale vs. Stock Sale: The Fundamental Divide
Before diving into entity-specific analysis, it’s critical to understand the asset sale vs. stock sale distinction, which often has a greater impact on tax outcomes than the entity choice itself.
What Is an Asset Sale?
In an asset sale, the buyer purchases the business’s individual assets—equipment, inventory, intellectual property, customer lists, and goodwill—rather than ownership interests. The legal entity (LLC, S Corp, or C Corp) remains with the seller after the transaction.
Tax implications for sellers:
- Proceeds are allocated among different asset classes under a purchase price allocation (typically using the residual method).
- Equipment and machinery gains are taxed as ordinary income under Section 1245 depreciation recapture.
- Real estate gains may receive capital gains treatment under Section 1250 (though some recapture may apply).
- Goodwill, customer lists, and other intangibles generate long-term capital gains (held more than one year).
- Inventory is taxed as ordinary income.
Buyer advantage: The buyer receives a step-up in basis for all purchased assets, enabling future depreciation and amortization deductions.
What Is a Stock Sale?
In a stock sale (or membership interest sale for LLCs), the buyer purchases the ownership interests directly. The entity’s assets and liabilities remain inside the business.
Tax implications for sellers:
- The entire gain is generally taxed as long-term capital gain, regardless of the underlying asset mix.
- No depreciation recapture at the seller level (the recapture potential remains inside the entity).
- Simpler transaction with fewer transfer requirements (no individual asset transfers).
Buyer disadvantage: The buyer inherits the entity’s existing tax basis in assets (carryover basis), missing out on future depreciation deductions. This is why buyers typically prefer asset sales.
The Negotiation Tug-of-War
The asset sale vs. stock sale decision is often the most contentious point in business sale negotiations. Generally:
- LLC sellers can more easily accommodate asset sales because the LLC can dissolve after the sale, and the tax impact is a single layer at the owner level.
- S Corp sellers face similar dynamics to LLCs for asset sales, with the added consideration of built-in gains tax if the S election is relatively recent.
- C Corp sellers face the most severe consequence from asset sales: the corporation pays tax on the gain at the entity level (21%), and then shareholders pay a second layer of tax when the after-tax proceeds are distributed as dividends (up to 23.8% including NIIT). This double taxation can consume 40%+ of the sale proceeds.
For this reason, C Corp sales are almost always structured as stock sales when possible—unless the buyer insists on an asset purchase. This fundamental dynamic is explored further in our S Corp vs. C Corp tax implications guide.
LLC Business Sale: Tax Treatment Under OBBBA
Single-Layer Taxation Advantage
The primary advantage of selling a business through an LLC is the single layer of taxation. When an LLC sells its assets, the gain flows through to the members’ personal tax returns via Schedule K-1. There is no entity-level tax (except in states with gross receipts taxes or franchise taxes).
For a single-member LLC taxed as a sole proprietorship:
- The entire gain is reported on Schedule C and Schedule D of Form 1040.
- Ordinary income components (depreciation recapture, inventory) are taxed at individual ordinary rates up to 37%, reduced to an effective 29.6% on qualifying QBI portions under the permanent Section 199A deduction.
- Capital gains components (goodwill, intangibles held >1 year) are taxed at the long-term capital gains rate of 20% plus 3.8% NIIT = 23.8%.
For a multi-member LLC taxed as a partnership:
- The same pass-through treatment applies, with gains allocated among members per the operating agreement.
- The partnership files Form 1065 as an information return, and members receive K-1s.
- The partnership itself does not pay federal income tax on the sale.
Depreciation Recapture Exposure for LLC Sellers
The most common surprise for LLC sellers is Section 1245 depreciation recapture. If the LLC claimed depreciation, Section 179 expensing, or bonus depreciation on equipment, vehicles, or other tangible personal property, the IRS requires the seller to “give back” those deductions at sale.
Example: An LLC purchased $500,000 in manufacturing equipment over the years, claiming full Section 179 and bonus depreciation. At sale, the equipment’s basis is $0, but its fair market value is $300,000. The entire $300,000 is recaptured as ordinary income—regardless of how long the equipment was held. If the LLC owner is in the top bracket, that’s $111,000 in federal tax on this component alone (reduced to $88,800 if the QBI deduction applies to this specific income stream).
Section 1250 recapture (for real estate) is generally less severe, taxing only the excess depreciation (above straight-line) at ordinary rates. However, unrecaptured Section 1250 gain (the total depreciation taken under straight-line) is taxed at a maximum rate of 25%, which is still higher than the 20% long-term capital gains rate.
Ordinary Income vs. Capital Gains Allocation
The purchase price allocation in an LLC asset sale determines the tax character of proceeds:
| Asset Category | Tax Character | Maximum Federal Rate | QBI Eligible? |
|---|---|---|---|
| Cash and cash equivalents | N/A (no gain/loss) | 0% | No |
| Trade accounts receivable | Ordinary income | 37% | Yes (20% QBI) |
| Inventory | Ordinary income | 37% | Yes (20% QBI) |
| Equipment & machinery (Sec. 1245) | Ordinary income (recapture) | 37% | Potentially* |
| Real estate (Sec. 1250) | Capital gain + 25% unrecaptured gain | 25% / 20% | No |
| Goodwill & intangibles | Long-term capital gain | 20% + 3.8% NIIT | No |
| Non-compete agreements | Ordinary income (seller) | 37% | Potentially* |
*QBI eligibility depends on whether the income qualifies as ordinary trade or business income under Section 199A rules.
LLC Membership Interest Sale
When a buyer purchases an LLC membership interest instead of assets, the seller recognizes capital gain or loss on the difference between the sale price and their outside basis in the interest. This generally results in more favorable capital gains treatment, but buyers resist this structure because they inherit the LLC’s low inside basis in assets.
Under current tax law, the sale of a partnership/LLC interest is treated as the sale of a capital asset, with the gain characterized by the “look-through” rules of Section 751. This means that “hot assets” (unrealized receivables and inventory) are still taxed as ordinary income even in a membership interest sale. This prevents sellers from converting ordinary income to capital gains simply by selling the interest rather than the assets.
For LLC owners considering entity conversion before a sale, our guide on when to convert an LLC to an S Corp provides timing considerations and tax implications.
S Corp Business Sale: Pass-Through Benefits With a Twist
Why S Corps Are Often the Optimal Sale Entity
S Corporations combine the pass-through advantage of LLCs with potential FICA tax savings, making them a popular structure for businesses anticipating a future sale. When an S Corp sells its assets:
- Gains flow through to shareholders proportionally, avoiding entity-level tax (with one important exception discussed below).
- The capital gains portion retains its character at the shareholder level, taxed at preferential long-term capital gains rates.
- Shareholders can use their increased outside basis (from pass-through income over the years) to offset gains.
The key advantage over LLCs is that S Corp shareholders have historically paid less in self-employment tax during operations (no SE tax on distributions, only on reasonable compensation). This means more retained earnings are available for reinvestment, potentially growing the business value more efficiently. See our analysis of self-employment tax savings across entity types for detailed calculations.
Built-In Gains Tax: The 5-Year Trap
The most significant tax trap in an S Corp sale is the Built-In Gains (BIG) tax under Section 1374. This applies when:
- A C Corporation converts to an S Corporation, and
- The S Corp sells appreciated assets within 5 years of the S election effective date.
During this 5-year recognition period, any gain attributable to the appreciation that existed at the time of the S election is subject to a corporate-level tax of 21% (the C Corp rate), in addition to the shareholder-level tax when the proceeds are distributed. This creates a temporary double-taxation scenario.
Example: A C Corp with assets worth $3 million and a tax basis of $1 million converts to an S Corp on January 1, 2024. If the business sells assets for $3 million on June 1, 2026 (within the 5-year window), the $2 million built-in gain is subject to the 21% corporate tax ($420,000) PLUS shareholder-level capital gains tax on the distribution. The total tax could exceed 40% of the gain—similar to C Corp double taxation.
After the 5-year recognition period expires, the S Corp can sell appreciated assets with only a single layer of tax at the shareholder level.
OBBBA impact: The OBBBA did not change the BIG tax rules. However, the permanent QBI deduction means that after the recognition period expires, S Corp shareholders benefit from the 20% QBI deduction on the ordinary income components of the sale—a significant advantage over the pre-OBBBA landscape.
FICA Savings on Sale Proceeds
A subtle but meaningful advantage of S Corps in a business sale: the proceeds from an asset sale are not subject to FICA/payroll tax. Unlike an LLC member who may face self-employment tax on certain pass-through income, S Corp shareholders pay no payroll tax on their share of sale proceeds—whether characterized as capital gains or ordinary income from depreciation recapture.
However, the IRS may scrutinize whether the selling S Corp shareholder received “reasonable compensation” during the final year of operations. If the IRS determines that officer compensation was unreasonably low in anticipation of the sale, they may reclassify distributions as wages, subject to payroll taxes. Our guide on S Corp reasonable compensation enforcement covers this risk in detail.
S Corp Stock Sale Dynamics
S Corp stock sales are generally simpler than C Corp stock sales because there’s no concern about accumulated earnings and profits (E&P) from S Corp years. However, if the S Corp was previously a C Corp, any leftover C Corp E&P creates complications:
- Distributions from E&P are treated as dividends (subject to double taxation).
- The Accumulated Earnings Tax may apply if the corporation retains earnings beyond reasonable business needs.
- Buyers may discount the purchase price for S Corps with significant C Corp E&P history.
C Corp Business Sale: Double Taxation and the QSBS Opportunity
The Double Taxation Problem
C Corporations are the only entity type where business sales can trigger true double taxation. Here’s how it works in an asset sale:
- Corporate-level tax: The C Corp recognizes gain on the sale of assets (sale price minus tax basis) and pays corporate income tax at the flat 21% rate.
- Shareholder-level tax: The after-tax proceeds are distributed to shareholders as either:
- Dividends (if the corporation has E&P): taxed at 23.8% (20% preferential rate + 3.8% NIIT)
- Return of capital (to the extent of stock basis): no tax
- Capital gain (for amounts exceeding stock basis): taxed at 23.8%
Combined effective rate on C Corp asset sale: Approximately 40% of total gain (21% corporate + ~24% shareholder on the remainder), compared to 23.8–29.6% for LLC/S Corp sales.
This is why C Corp asset sales are universally disfavored by tax planners. When a buyer insists on an asset purchase from a C Corp, sophisticated sellers often restructure the transaction or the entity before closing.
QSBS Section 1202: The $10 Million Exclusion
The most powerful tax planning tool for C Corp sellers is Section 1202—Qualified Small Business Stock (QSBS). If the C Corp meets certain requirements, shareholders can exclude up to the greater of $10 million or 10x the shareholder’s basis in the stock from federal capital gains tax.
QSBS requirements:
- The corporation must be a domestic C Corp at all times after issuance of the stock.
- The corporation must be a “qualified small business”—gross assets ≤ $50 million at all times before and immediately after the stock issuance.
- The stock must be acquired at original issuance (not purchased from another shareholder).
- The corporation must be in a qualified trade or business (excluding professional services, banking, farming, mineral extraction, and hospitality).
- The shareholder must hold the stock for at least 5 years before sale.
The QSBS advantage in numbers:
If a founder holds QSBS stock with a $500,000 basis and sells for $8 million:
- The entire $7.5 million gain is excluded from federal income tax.
- Even the 3.8% NIIT does not apply to the excluded gain.
- State tax treatment varies—some states conform to the federal exclusion, others do not.
If the same founder sells for $15 million with a $500,000 basis:
- $10 million of the $14.5 million gain is excluded.
- The remaining $4.5 million is taxed at 23.8% = $1,071,000 in federal tax.
- Alternatively, the shareholder can use the “10x basis” exclusion ($5 million), which is less favorable than the $10 million cap.
OBBBA Impact on QSBS
The OBBBA did not modify Section 1202 directly, but several indirect effects are noteworthy:
- Permanent QBI deduction makes pass-through entities more competitive with QSBS, since the ordinary income portion of an LLC/S Corp sale now receives a 20% deduction. This narrows (but does not eliminate) the QSBS advantage for smaller sales.
- Lower corporate rate certainty (21% made permanent) means the double taxation cost for non-QSBS C Corp sales is fixed and predictable—bad for planning, as there’s no rate reduction on the horizon.
- Estate tax exemption increase interacts with QSBS gifting strategies: founders can gift QSBS stock to family members (each receiving their own $10 million exclusion) before a sale, potentially multiplying the total exclusion.
When C Corp Is Still the Right Choice for a Sale
Despite the double taxation risk, C Corps remain optimal for business sales when:
- The company is in a QSBS-eligible industry and the founder has held stock for 5+ years.
- The sale price exceeds $10 million and the company has significant basis (making the 10x basis exclusion larger).
- The buyer is willing to structure the transaction as a stock purchase.
- The company is targeting institutional buyers or private equity, who often prefer acquiring C Corp stock for legal liability reasons.
- Founders plan to gift shares to multiple family members before the sale, multiplying QSBS exclusions.
For a comprehensive comparison of C Corp taxation versus other entities, see our LLC vs. C Corp complete guide and our analysis of pass-through vs. double taxation entity choices.
Real-World Comparison: $2 Million Business Sale by Entity Type
To illustrate the dramatic impact of entity structure on sale proceeds, let’s model the sale of a business for $2,000,000 with the following asset allocation and assumptions:
Assumptions
- Business held as: (a) Single-member LLC, (b) S Corp (no BIG tax), (c) C Corp (no QSBS)
- Purchase price allocation:
- Equipment (Section 1245 property): $400,000 (basis $100,000)
- Inventory: $200,000 (basis $200,000)
- Real estate (Section 1250 property): $300,000 (basis $150,000, straight-line depreciation)
- Goodwill and intangibles: $1,100,000 (basis $0)
- Seller’s top federal marginal rate: 37%
- Long-term capital gains rate: 20% + 3.8% NIIT = 23.8%
- State tax rate: 6% (blended; assume full deductibility subject to SALT cap)
- QBI deduction applies to ordinary income components where eligible
LLC Tax Calculation
| Component | Gain | Tax Character | Federal Tax | State Tax | Net to Seller |
|---|---|---|---|---|---|
| Equipment (Sec. 1245) | $300,000 | Ordinary (QBI eligible) | $88,800 (29.6% effective after QBI) | $18,000 | $193,200 |
| Inventory | $0 | N/A | $0 | $0 | $0 |
| Real estate (unrecaptured 1250) | $150,000 | 25% max rate | $37,500 | $9,000 | $103,500 |
| Goodwill & intangibles | $1,100,000 | LTCG (23.8%) | $261,800 | $66,000 | $772,200 |
| Total | $1,550,000 | $388,100 | $93,000 | $1,068,900 |
Effective tax rate on gain: ~31.0% (combined federal + state)
S Corp Tax Calculation (No BIG Tax)
| Component | Gain | Tax Character | Federal Tax | State Tax | Net to Seller |
|---|---|---|---|---|---|
| Equipment (Sec. 1245) | $300,000 | Ordinary (QBI eligible) | $88,800 (29.6% after QBI) | $18,000 | $193,200 |
| Inventory | $0 | N/A | $0 | $0 | $0 |
| Real estate (unrecaptured 1250) | $150,000 | 25% max rate | $37,500 | $9,000 | $103,500 |
| Goodwill & intangibles | $1,100,000 | LTCG (23.8%) | $261,800 | $66,000 | $772,200 |
| Total | $1,550,000 | $388,100 | $93,000 | $1,068,900 |
The S Corp result matches the LLC when there’s no built-in gains tax. The difference is operational: the S Corp owner saved FICA taxes during ownership years.
Effective tax rate on gain: ~31.0% (combined federal + state)
C Corp Tax Calculation (No QSBS, Asset Sale)
| Component | Gain | Corporate Tax (21%) | Remaining | Shareholder Tax (23.8%) | Total Tax | Net to Seller |
|---|---|---|---|---|---|---|
| Equipment | $300,000 | $63,000 | $237,000 | $56,406 | $119,406 | $180,594 |
| Inventory | $0 | $0 | $0 | $0 | $0 | $0 |
| Real estate | $150,000 | $31,500 | $118,500 | $28,203 | $59,703 | $90,297 |
| Goodwill & intangibles | $1,100,000 | $231,000 | $869,000 | $206,822 | $437,822 | $662,178 |
| Total | $1,550,000 | $325,500 | $291,431 | $616,931 | $933,069 |
Effective tax rate on gain: ~39.8% (combined federal + state would push this to ~43%)
The QSBS Difference
If the C Corp seller qualifies for QSBS exclusion ($10M > $2M sale price), and has held the stock for 5+ years:
- Federal capital gains tax: $0
- State tax: ~$93,000 (assuming non-conforming state)
- Net to seller: ~$1,457,000
Frequently Asked Questions: Business Sale Tax Strategy by Entity Type
Does the OBBBA’s permanent QBI deduction apply to proceeds from selling my LLC or S Corp?
The 20% QBI deduction under Section 199A applies only to the ordinary income portion of a business asset sale—primarily Section 1245 depreciation recapture on equipment and any inventory gains. It does not apply to capital gains from selling goodwill, customer lists, or other intangible assets, nor does it apply to the sale of partnership/LLC interests or S Corp stock. For a typical business sale where 70%+ of the value is goodwill, the QBI benefit on the sale is modest but still meaningful on the equipment recapture portion.
How does built-in gains tax affect an S Corp business sale compared to an LLC sale?
If your company was originally a C Corp and converted to S Corp within the last 5 years, the built-in gains (BIG) tax applies at the corporate level (21%) on any appreciation that existed at the time of the S Corp election. This creates a double-tax layer similar to a C Corp sale for that “built-in” appreciation. After the 5-year recognition period expires, the S Corp sale proceeds flow through as pass-through income with no corporate-level tax. LLCs that were never C Corps have no BIG tax exposure, making them cleaner for asset sales.
Can I convert my C Corp to an S Corp right before selling to avoid double taxation on the business sale?
Converting a C Corp to an S Corp immediately before a sale triggers the built-in gains tax on all appreciated assets at the time of conversion, payable at the corporate level (21%) when those assets are eventually sold. The BIG recognition period is 5 years, meaning the corporate-level tax applies to pre-conversion appreciation regardless of when the sale occurs within that window. While an F-reorganization or other pre-sale restructuring can help in certain situations, there is no simple last-minute switch to erase C Corp double taxation on a business sale. Early planning—at least 5 years before a potential exit—is essential.
What is the QSBS Section 1202 exclusion and how much business sale tax can it save?
The Qualified Small Business Stock (QSBS) exclusion under Section 1202 allows C Corp shareholders to exclude up to $10 million or 10x basis (whichever is greater) in capital gains from the sale of qualified C Corp stock held for more than 5 years. For a $5 million business sale where the seller qualifies, this means zero federal capital gains tax on the entire gain. To qualify, the C Corp must have gross assets under $50 million at issuance, be in a qualified trade or business (excluding professional services, farming, hospitality, and mineral extraction), and the stock must have been acquired at original issuance.
Are proceeds from selling my S Corp stock taxed differently than selling LLC assets in a business sale?
Yes. Selling S Corp stock produces a single capital gain at the shareholder level taxed at preferential long-term capital gains rates (20% + 3.8% NIIT), with no depreciation recapture at the shareholder level. Selling LLC assets (the default in an LLC) triggers character allocation across asset classes—Section 1245 recapture taxed as ordinary income, Section 1250 recapture at 25%, and capital gains for goodwill—meaning a portion is taxed at higher ordinary rates. Buyers generally prefer asset purchases for basis step-up, so sellers often accept asset sale treatment in exchange for a higher purchase price or earnout terms.
How does the OBBBA SALT cap increase affect my business sale if I live in a high-tax state?
The OBBBA’s increased SALT cap of $40,000 (up from $10,000) for 2026 provides modest relief for business sellers in high-tax states. If you sell an LLC or S Corp and realize $2 million in gains with $150,000 in state income taxes, you can now deduct $40,000 of that on your federal return (saving ~$14,800 at the 37% bracket), whereas previously you could only deduct $10,000. The remaining $110,000 in state taxes remains nondeductible for federal purposes. For C Corp sellers, this doesn’t apply because corporate-level state taxes are fully deductible at the entity level.
What pre-sale tax planning should I do before selling my business in H2 2026?
For a business sale closing in late 2026 or 2027, the most impactful pre-sale strategies include: (1) If you’re a C Corp, evaluate QSBS eligibility and holding period—this can save millions. (2) If you’re an LLC considering S Corp election, file at least 5 years before sale to avoid BIG complications. (3) Commission a quality-of-earnings report and tax allocation study to negotiate the best asset purchase price allocation. (4) Maximize retirement plan contributions (see our Solo 401(k) contribution guide) to shelter a portion of sale proceeds. (5) Review entity-level compliance—IRS audit rates by entity type show that pre-sale years face heightened scrutiny.
Plan Your Exit Strategy Today
Your business entity decision is one of the few tax variables you can control before a sale—but only if you plan ahead. Whether you’re selling in 6 months or 6 years, the right entity structure could save you hundreds of thousands of dollars.
Next steps:
- Review your current entity type and how it would be taxed in a sale using our LLC vs S Corp Complete Guide
- If you’re a C Corp owner, check your QSBS and S Corp conversion eligibility
- Maximize pre-sale retirement contributions with a Solo 401(k) strategy
- Understand pass-through vs double taxation implications for your sale
This article reflects OBBBA provisions as signed into law in 2026. Business sale tax rules involve complex interactions between federal, state, and local tax codes. Always consult a licensed tax professional and M&A advisor before making entity decisions related to a business sale.