Selling Your Startup: Tax Planning Moves to Make Before the Deal Closes

The 60 to 120 Day Window That Determines Your Tax Bill

Once you sign a letter of intent to sell your company, a clock starts. You typically have 60 to 120 days before the deal closes. This is your planning window, and it is the most consequential financial period of your life.

After the deal closes, nearly every meaningful tax strategy becomes unavailable. Shares you could have gifted are now cash. Trusts you could have funded are now pointless. Charitable donations of appreciated stock become charitable donations of cash, with dramatically worse tax treatment. The difference between planning before and after closing can easily exceed $2 million to $5 million on a $20 million exit, and the gap scales with deal size.

Every strategy in this guide must be initiated before the acquisition closes. Some require weeks of legal documentation. Start immediately.

QSBS Exclusion: Verify and Stack Before It Is Too Late

Section 1202 allows you to exclude up to $10 million in capital gains (or 10x your basis, whichever is greater) on qualified small business stock. At a 23.8% combined federal rate (20% long term capital gains plus 3.8% net investment income tax), that is up to $2.38 million in federal tax savings per taxpayer.

Confirm Your Shares Qualify

Four requirements must all be met:

• C corporation at issuance: Your stock must have been issued while the company was a C corp. Shares issued during an LLC phase do not qualify, even if the company later converted.
• $50 million gross assets test: The company's aggregate gross assets must not have exceeded $50 million at the time your shares were issued and immediately after.
• Five year holding period: You must have held the stock for at least five years. If you are short of five years, the deal timeline matters enormously.
• Active business requirement: At least 80% of company assets must have been used in a qualified active trade or business. Most technology companies qualify. Professional services, financial services, and hospitality companies do not.

Stack the Exclusion Across Family Members

The $10 million exclusion applies per taxpayer, per issuer. This means you can multiply the exclusion by gifting shares before the sale:

• Gift shares to your spouse: Your spouse gets their own $10 million exclusion. A married couple can exclude up to $20 million.
• Gift shares to irrevocable trusts: Each trust is treated as a separate taxpayer. Two trusts could add another $20 million in exclusion capacity.
• Gift shares to adult children: Each child receives their own $10 million exclusion.

A married founder with two trusts could potentially exclude $40 million or more in capital gains. At a 23.8% federal rate, that is nearly $9.5 million in tax savings. These gifts must be completed before the sale closes and must use shares, not cash proceeds.

Installment Sale Structure: Spread the Gain Across Years

If the acquisition includes an earnout, seller note, or any form of deferred consideration, you may be able to report the gain using an installment sale under Section 453. Instead of recognizing the entire gain in the year of closing, you spread it across the years in which you actually receive payments.

Why This Matters

A founder receiving $15 million in a single year faces the highest federal bracket (37% on ordinary income components) plus the 3.8% net investment income tax. If that same $15 million is received over five years at $3 million per year, each year's income stays in lower brackets. The cumulative savings from bracket management alone can reach $400,000 to $800,000 depending on the deal structure and other income.

The Key Limitation

Installment sale treatment is not available if your stock is traded on an established securities market. For private company acquisitions paid partly in cash and partly through earnouts or seller financing, it is often available but requires careful structuring with your tax advisor before closing.

Charitable Giving: Donate Shares, Not Cash

Donating appreciated shares before the sale produces two benefits simultaneously: you receive a fair market value deduction against your income, and you permanently avoid capital gains tax on the donated shares. Donating cash after the sale provides the deduction but none of the capital gains benefit.

Donor Advised Fund

A donor advised fund (DAF) is the simplest approach. Transfer shares before closing, receive an immediate deduction for the fair market value, and recommend grants to charities over time. A $1 million contribution of shares with a $50,000 basis saves approximately $226,000 in capital gains tax (versus selling the shares and donating cash) while still generating the full $1 million deduction.

Charitable Remainder Trust

A charitable remainder trust (CRT) is more complex but powerful for larger amounts. You transfer shares to the CRT before the sale. The CRT sells the shares tax free and invests the proceeds. The trust pays you (or you and your spouse) an annuity or unitrust amount for life or a term of years. At the end, the remainder passes to charity.

The CRT provides a partial charitable deduction at funding, defers capital gains recognition over the payout period, and provides ongoing income. For founders looking to create a steady income stream from a lump sum exit, a CRT funded with presale shares is one of the most tax efficient structures available.

Opportunity Zone Reinvestment: Tax Free Growth on New Investments

After the sale closes, you have 180 days to invest capital gains into a Qualified Opportunity Zone Fund (QOZF). While the original deferral and basis step up benefits from the 2017 Tax Cuts and Jobs Act have largely phased out, the most valuable benefit remains: gains on the opportunity zone investment itself are completely tax free if held for at least 10 years.

For a founder reinvesting $5 million of sale proceeds into an opportunity zone fund that doubles over 10 years, the $5 million in appreciation is entirely excluded from federal tax. At a 23.8% rate, that is $1.19 million in savings on the growth alone.

The 180 day window begins on the date you recognize the gain (typically closing day), not the date you receive the cash. Plan your opportunity zone investments during the LOI period so you can execute quickly after closing.

Estate Planning at the Last Low Valuation

The period between signing an LOI and closing presents a unique estate planning opportunity. If there is any genuine uncertainty about whether the deal will close (and there always is), the fair market value of your shares may still be lower than the acquisition price. This discount reflects deal risk, regulatory uncertainty, and the probability of closing.

Transfer to Irrevocable Trusts

Move shares into estate planning vehicles at the current (discounted) value:

• GRATs (Grantor Retained Annuity Trusts): Transfer shares, retain an annuity stream, and pass the appreciation above a hurdle rate to beneficiaries free of gift tax. A zeroed out GRAT funded before closing can transfer millions in appreciation with no gift tax cost.
• SLATs (Spousal Lifetime Access Trusts): Remove assets from your estate while retaining indirect access through your spouse.
• IDGTs (Intentionally Defective Grantor Trusts): Sell shares to the trust in exchange for a promissory note. You pay income tax on the trust's earnings (reducing your estate), while the trust's assets grow outside your estate.

If the deal closes at $50 million and you transferred shares at a pre-closing valuation of $35 million, the $15 million in appreciation passes to your beneficiaries without gift or estate tax consequences. At a 40% estate tax rate, that is $6 million in estate tax savings.

State Tax Planning: The Relocation Question

State income tax on a large exit can be the single biggest variable in your total tax bill. California taxes capital gains at ordinary income rates, with a top rate of 14.4% including the mental health services tax. On a $20 million gain, that is $2.88 million to California alone.

A move to a zero income tax state (Texas, Florida, Nevada, Washington, Wyoming, Tennessee, or others) before the sale eliminates this entirely. However, the execution must be genuine and thorough:

• California applies a "close of the deal" sourcing rule. If California determines you were a resident when the transaction was effectively completed, it will tax the full gain regardless of where you live on closing day.
• Document everything. Change your driver's license, voter registration, and bank accounts. Lease or buy a residence in the new state. Cancel your California gym memberships, doctors, and club memberships. Spend the majority of your time in the new state.
• Allow sufficient time. Moves completed weeks before closing are aggressively challenged. Six months or more of established residency in the new state significantly strengthens your position.

California's Franchise Tax Board audits departing high income individuals with particular scrutiny. Work with a tax attorney who specializes in state residency changes before initiating a move.

The Post Sale Plan: What to Do With the Cash

After the deal closes, you will hold the largest cash position of your life. The single most important rule: do not make major investment decisions for at least six months.

Immediate Steps

1. Park proceeds in Treasury bills or a government money market fund. At current yields, you earn meaningful income with zero credit risk while you plan.
2. Engage a CPA experienced with M&A transactions to handle the complex tax return. Installment sale reporting, QSBS exclusion claims, charitable deduction substantiation, and state allocation all require specialized expertise.
3. Update your estate plan for your new net worth. Existing wills, trusts, and beneficiary designations were designed for a different financial reality.

Over the Following Year

4. Develop a comprehensive investment plan with a fiduciary advisor. Define your risk tolerance, liquidity needs, time horizon, and goals before allocating a single dollar.
5. Consider your cash flow needs. Many founders underestimate how quickly lifestyle inflation erodes a seemingly large sum. A $15 million after tax exit sounds enormous until you buy a $4 million house, set aside $3 million for taxes you did not fully plan for, and fund two years of living expenses while figuring out what to do next.
6. Resist the urge to angel invest aggressively. The temptation to deploy capital into friends' startups is strong. Cap your total angel portfolio at a fixed percentage of liquid net worth (5% to 10%) and enforce it ruthlessly.

The Cost of Waiting

Every strategy in this guide requires legal documentation, financial modeling, and coordination across multiple advisors. None of it can be done the week before closing. The founders who save millions are the ones who engage tax counsel the day the LOI is signed, not the day the wire hits their account.

If you are in the LOI period right now, your next step is a 90 minute meeting with a tax attorney, a CPA, and an estate planning attorney in the same room. That single meeting, conducted eight weeks before closing, is the highest return on time you will ever earn.