Exit Planning for Retirement: Timing, Tax and the Rules That Changed

Exit planning for retirement is mostly a timing problem wearing a tax disguise, and two of the things owners are told about it are wrong. Holding a business longer does not earn a better capital gains rate: long-term treatment turns on a holding period of more than one year, and after that the rate is set by taxable income rather than by how long you owned the company. And the federal estate tax exclusion did not halve in 2026. Revenue Procedure 2025-32 sets the basic exclusion amount at $15,000,000 for calendar year 2026, indexed for inflation from 2027.

The short version: what you keep depends on how the sale is structured, how the payments are spread across tax years, and who ends up owning the business, not on how long you have already held it.

This page states rules and names the body that publishes each one. It is not tax or legal advice, and none of it is advice about your situation. Your own CPA and attorney are the people to take it to.

The holding-period rule, stated correctly

The idea that a longer hold buys a better rate has two problems.

The first is that capital gains rates track taxable income. For tax years beginning in 2026, Revenue Procedure 2025-32 puts the 0 percent rate up to $98,900 of taxable income for married couples filing jointly and up to $49,450 for single filers, the 15 percent rate up to $613,700 and $545,500 respectively, and 20 percent above those figures. Owning the business for twenty years instead of five moves none of those lines. The full table by filing status is in exit planning financial considerations.

The second problem is bigger. Most small-business sales are not one capital gain at all. The IRS position is that “the sale of a business usually is not a sale of one asset. Instead, all the assets of the business are sold. Generally, when this occurs, each asset is treated as being sold separately for determining the treatment of gain or loss.” The price is allocated across seven asset classes by the residual method on Form 8594, which both buyer and seller file. Parts of the price land on inventory and receivables and are taxed as ordinary income; parts trigger depreciation recapture, with unrecaptured section 1250 gain taxed at 25 percent under section 1(h); only some of it reaches the long-term capital gains rates at all.

There is exactly one place in the code where a longer hold produces a better outcome for a business owner, and it applies to stock rather than to a business. Section 1202, as rewritten by Public Law 119-21 on July 4, 2025, excludes 50 percent of gain on qualified small business stock held three years, 75 percent at four years and 100 percent at five or more. Those tiers apply only to stock acquired after July 4, 2025. Stock acquired on or before that date runs under the prior rules, which require more than five years of holding for any exclusion. Whether any particular stock qualifies is a technical question with several tests, and it belongs with your CPA.

One more rate sits on top for larger sales. The net investment income tax adds 3.8 percent above modified adjusted gross income of $250,000 for joint filers, $125,000 for married filing separately and $200,000 for everyone else. Those thresholds are fixed by statute and are not adjusted for inflation, so a single large year of gain meets them at the same level it would have met a decade ago.

Timing the sale against the income you need

A retirement exit has a question a straight sale does not: whether you want the money at once or over time, and what each choice does to the tax year it lands in.

An installment sale is the mechanism for spreading it. Publication 537 defines one as “a sale of property where you receive at least one payment after the tax year of the sale,” reported on Form 6252. Regular inventory sales, dealer dispositions and publicly traded stock or securities are not eligible. Because the rate brackets and the net investment income thresholds above are annual, a price received across several years is measured against those figures several times rather than once, which is the whole appeal.

One part does not spread. Publication 537 states that “you must report any depreciation recapture income in the year of sale, whether or not an installment payment was received that year,” on Form 4797. An owner planning to live on installment payments should know that the recapture tax can arrive before most of the cash does.

Deferred money also carries a risk the closing check does not. Advisors surveyed by the IBBA and the M&A Source for the second quarter of 2026 reported cash at close of 88 percent of consideration for deals under $500,000, 92 percent from $500,000 to $1 million, 91 percent from $1 million to $2 million, 84 percent from $2 million to $5 million and 83 percent from $5 million to $50 million. The remainder is seller financing, earn-outs and retained equity combined, and the survey does not publish the split between them.

If your buyer uses an SBA 7(a) loan, the terms of any seller note are not entirely yours to set. Under the SBA’s Standard Operating Procedure, seller debt counts toward the buyer’s required equity injection only if it is “on full standby (no payments of principal or interest for the term of the 7(a) loan)” and does not exceed half of the required injection. SOP 50 10 8.1, effective October 1, 2026, also provides that seller debt becomes “eligible to be refinanced after it has been in place and current for 36 months,” extended from 24 months under SOP 50 10 8, the procedure in force until then. A note on full standby is a promise, not an income stream, and a retiring owner counting on monthly payments needs to know which kind of note is being written.

Selling to your employees: the ESOP route

An employee stock ownership plan is a way out that keeps the business where it is. The National Center for Employee Ownership describes an ESOP as “a type of retirement plan, similar to a 401(k) plan, that invests primarily in company stock and holds its assets in a trust for employees,” in which participants “accrue shares in the plan over time and are paid out by having their shares bought back, typically after they leave the company.” NCEO adds that Congress created incentives for an ESOP to borrow money, “allowing them to purchase more shares than they otherwise would be able to.”

The scale, from Department of Labor Form 5500 filings for plan year 2023, published by NCEO in January 2026: 6,609 ESOPs covering 6,411 companies, of which 5,993 are private, with 15.1 million total participants, over 10.9 million of them active, over $2 trillion in assets and 309 new plans created in the year. NCEO notes the filings run up to two years behind, so 2023 is the current data year.

The tax feature that draws sellers is section 1042, which lets a seller defer gain by rolling the proceeds into qualified replacement property. The statutory conditions:

• The stock must be sold to an employee stock ownership plan as defined in section 4975(e)(7), or to an eligible worker-owned cooperative.
• The plan or cooperative must hold, immediately after the sale, at least 30 percent of each class of outstanding stock or of the total value of outstanding stock.
• The seller’s holding period in the stock must be “at least 3 years (determined as of the time of the sale).”
• The replacement property must be bought in “the period which begins 3 months before the date on which the sale of qualified securities occurs and which ends 12 months after the date of such sale,” and must be securities issued by a domestic operating corporation meeting the statute’s tests.

Section 1042(h) adds a limit for S corporation sellers on sales from January 1, 2028: the election is capped at “not more than 10 percent of the amount realized on such sale.” An S corporation owner considering this route should have the date in the plan.

Two different thresholds are easy to confuse. Section 1042 needs 30 percent. The SBA will finance an ESOP transaction only where the plan or trust is “purchasing a controlling interest (51% or more) in the employer small business.” In exchange, SBA-financed ESOP purchases at that level are not subject to the equity injection requirement and are exempt from the new quality of earnings requirement, and transaction costs of the purchase may be financed, “but not the costs associated with setting up the trust.”

What your last year of ownership looks like

Very few exits end at the closing table. Three sourced points shape what the period afterward looks like.

The deferred portion of the price usually depends on what happens next. The IBBA defines an earn-out as “a contractual provision stating that the seller of a business is to obtain additional future consideration based on the business achieving certain future business goals.” An owner who has mentally retired can find a meaningful share of the price still riding on decisions someone else is now making.

If you are selling part of the business rather than all of it, the SBA’s owner buyout rules bind the shape of the deal. At least one member of original ownership must remain in place after the transaction and guarantee the loan, and “individuals not currently employed by the business may only acquire less than 50% of the total equity and may not become the largest direct or indirect shareholder.” A transaction that does not meet that has to be processed as an initial acquisition instead, which carries a 10 percent equity injection that cannot be reduced.

And your own pay is a diligence item. The SBA’s quality of earnings requirement, which applies to 7(a)-financed business expansion and initial acquisition transactions with a purchase price of $3 million or more from October 1, 2026, requires the report to document all adjustments to reported earnings “including non-recurring revenue or expenses, above- or below-market owner compensation, related-party transactions, deferred maintenance, and accounting methodology differences between cash-basis and accrual-basis reporting.” Paying yourself unusually little in the run-up to a sale does not survive that review. The SBA also names outright sales, gradual sales and lease arrangements as ways ownership transfers, and advises settling in advance how the business will be run before closing and how much access the buyer has to information.

What passes to your family, and the number that did not change

Plenty of exit-planning material written in 2024 and 2025 assumed the estate and gift tax exclusion would fall by roughly half at the start of 2026. It did not. Revenue Procedure 2025-32 states that “section 70106 of the OBBBA amends section 2010(c)(3) by increasing the basic exclusion amount to $15,000,000 for calendar year 2026,” and that “these numbers are adjusted for inflation for taxable years beginning after December 31, 2026.”

There is also a deferral rule aimed squarely at business owners. Where “the value of an interest in a closely held business” exceeds 35 percent of the adjusted gross estate, section 6166 lets an executor elect to pay the estate tax attributable to that interest “in 2 or more (but not exceeding 10) equal installments,” with the first due within five years of the normal payment date and a reduced interest rate on the 2-percent portion under section 6601(j). The statute defines an interest in a closely held business to cover a proprietorship, a partnership in which the decedent held a 20 percent capital interest or which had 45 or fewer partners, and a corporation in which the decedent held 20 percent of the voting stock or which had 45 or fewer shareholders.

Those are the rules. Whether any estate qualifies for either of them, and what to do about it, is a question for that estate’s own attorney and tax adviser. If the business is going to family rather than to a buyer, exit planning for family-owned businesses covers that route, and the buy-sell agreement point in exit planning legal considerations matters to any owner whose shares are subject to one.

Who to bring in, and when

A CPA prices the structures against your own return and prepares the allocation both sides will file, and is the person to ask what an installment sale does to your income across several tax years. A credentialed valuer establishes what the business is worth; for a 7(a) change of ownership the SBA accepts only a qualified source holding an ASA, CBA, ABV, CVA or BCA accreditation. An estate attorney reads the transfer-tax rules above against your actual documents, and a transaction attorney drafts the sale. Where the route is an ESOP, the plan, the trust and the section 1042 election need specialist advice on all three sides. The practical sequencing is in the exit planning process checklist and the routes are compared in business exit strategies and options. Our directory lists CPA firms by state, and where the business needs its reporting and forecasting tightened before anyone looks at it, fractional CFO work is the closer description of the help.

Frequently Asked Questions

Sources

17 links

• IRS: sale of a business
• IRS Publication 537, Installment Sales
• IRS Revenue Procedure 2025-32
• IRS: net investment income tax
• IRS: Instructions for Form 8594, Asset Acquisition Statement Under Section 1060
• 26 U.S. Code section 1202, partial exclusion for gain from certain small business stock
• 26 U.S. Code section 1042, sales of stock to employee stock ownership plans or certain cooperatives
• 26 U.S. Code section 6166, extension of time for payment of estate tax where estate consists largely of interest in closely held business
• 26 U.S. Code section 1, tax imposed
• SBA SOP 50 10 8.1, effective October 1, 2026
• SBA SOP 50 10 8, effective June 1, 2025
• SBA: close or sell your business
• NCEO: employee ownership by the numbers
• NCEO: what is employee ownership
• IBBA and M&A Source Market Pulse Q2 2026 highlights
• IBBA resource center glossary
• BizBuySell Insight Report