Section 1202 of the IRC offers a federal capital gains exclusion (up to 100%) on Qualified Small Business Stock (QSBS) held more than 5 years. For sellers who structure correctly, this is a *huge* benefit. For most route operators, it's not available, but it's worth understanding.
Who qualifies.
- C-corporation (not LLC, not S-corp at time of stock issuance)
- Qualified small business: gross assets under $50M at issuance
- Active trade or business in a qualified industry (most service businesses qualify; some don't, investment, finance, hospitality, performing arts, etc. are excluded)
- Stock held more than 5 years
- Stock acquired at original issuance (not purchased from another shareholder)
The benefit. Up to $10M (or 10× basis, whichever is greater) of capital gain excluded from federal tax per shareholder per company. On a $5M sale of qualifying stock with $50k basis, that's potentially $1M+ in federal tax savings.
Why most route deals miss this. Most operators run as LLCs or S-corps for the operational tax benefits (pass-through, no double tax). Switching to C-corp loses those advantages. The 5-year hold is a long commitment.
Where it fits. Buyers planning to acquire and hold for 7+ years, comfortable with C-corp structure, and confident about the eventual exit value. ROBS funding (covered earlier) requires C-corp, which incidentally makes QSBS available, talk to a tax advisor about stacking the strategies.
State-level treatment varies. CA, NJ, MS, PA, AL do not conform; you'll still owe state tax on the gain even if federal is excluded.