You started the business in 2005. You put in $150,000. Today it’s worth $2.5 million.

If you sell it, the IRS taxes the $2.35 million gain. Federal capital gains rate plus New York’s rate. Depending on your bracket, you’re handing over $650,000 to $750,000 before you see a dime.

If you die holding it? Your heirs inherit the business at $2.5 million. That’s their starting basis. If they sell the next day, the taxable gain is zero.

That’s not a loophole. That’s Section 1014 of the tax code, and it’s been the law for decades.

What “Basis” Actually Means

“Basis” is the number the IRS uses to calculate your gain. Buy something for $100,000, sell it for $400,000 — the taxable gain is $300,000. Simple.

When you die, the tax code resets that starting number to whatever the asset is worth on the date of death. Your heirs inherit at current fair market value. All the appreciation that built up during your lifetime — gone, for tax purposes. They never pay capital gains on it.

This is why holding appreciated assets until death is often the right call. Not just for sentimental reasons. For math reasons.

The Numbers on a Real Business

Say you own an S-corp worth $4 million. Your adjusted basis is $400,000 — the original investment plus income you already paid tax on over the years. If you sold today, the gain is $3.6 million. At a combined federal and New York rate of around 32–35% for a high earner in this state, you’re looking at $1.1 to $1.25 million in tax.

Your heirs inherit the same S-corp shares with a $4 million basis. They sell for $4 million. Tax owed: zero.

The gain was $3.6 million. All of it disappeared.

I see clients sit on this kind of planning for years without realizing what they’re sitting on. The step-up doesn’t require any structures or elections. It’s automatic. But you have to actually die holding the asset, not sell it before then.

What the OBBBA Changed — and What It Didn’t

The One Big Beautiful Bill Act, signed into law in July 2025, permanently raised the federal estate tax exemption to $15 million per person — $30 million for a married couple — indexed for inflation going forward.

Before that, the exemption was around $13.6 million and was scheduled to drop in half at the end of 2025. The OBBBA fixed that cliff.

What it did not change: the step-up in basis. That survived. There were serious proposals to eliminate it over the years, and they went nowhere. Your heirs still inherit appreciated assets at fair market value.

For most small business owners, the federal estate tax isn’t the primary concern anymore. $15 million is a lot of runway. The bigger issue is income tax — specifically, how to transfer appreciated business value to the next generation without triggering capital gains along the way. And the step-up is the main answer.

If you've been building business value for years and haven't mapped out what happens at death, that's the conversation to have now. Schedule a planning call with Geiger Tax.

Gifts During Life Work Differently

Here’s where people get tripped up. If you gift 20% of your S-corp to your child today, they inherit your basis — whatever you originally paid, adjusted for retained earnings. That’s called “carryover basis.” When they eventually sell, they pay capital gains on the same embedded appreciation you would have paid on.

The gift removes that interest from your estate, which matters if you’re above or near the $15 million exemption. Below that threshold, giving away appreciated assets during your lifetime can actually be the wrong move. You’re eliminating the step-up for no estate tax benefit.

This is the planning question worth asking every few years: does it make more sense to give now or hold until death?

There are strategies that try to get the best of both — like an Intentionally Defective Grantor Trust, which removes appreciation from the estate while keeping the income tax characteristics. That’s advanced territory. But it all starts with understanding basis.

What Gets the Step-Up — and What Doesn’t

Most assets qualify: S-corp shares, LLC membership interests, real estate, investment accounts, closely held business interests.

What doesn’t qualify:

IRAs and 401(k)s. Retirement accounts are tax-deferred income — the IRS never taxed it going in. Your heirs pay ordinary income tax on every dollar they withdraw, at whatever rate applies to them, regardless of what the account is worth.

“Income in respect of a decedent” (IRD). Things like accounts receivable a sole proprietor hadn’t collected, or deferred compensation, or installment sale proceeds. The income tax follows the income even through death.

Annuities. Partial step-up, complicated rules.

This distinction matters when you’re thinking about which assets to leave to whom. A $500,000 IRA and $500,000 in S-corp stock are not equivalent inheritances. One of them carries a significant embedded tax bill.

The S-Corp and LLC Angle

For an S-corp, the step-up applies to the stock — the shares your heirs inherit. It does not automatically change the inside basis of the company’s assets: the equipment, the goodwill, the real estate the business owns.

For an LLC taxed as a partnership, there’s a Section 754 election that allows the estate to push the basis step-up through to the underlying assets. That’s worth doing in many situations — it creates additional depreciation deductions for the heirs and reduces future taxable gain on those assets. Timing matters here; the election typically needs to be made on the LLC’s final return for the year of death.

New York’s Separate Problem

New York has its own estate tax with a 2026 exemption of $7.16 million. That’s well below the federal $15 million.

If your estate is between $7.16 million and $15 million — no federal tax, but potentially significant New York estate tax — you’re in a gap that requires its own planning.

Worse, New York has a cliff provision. If your estate exceeds 105% of the exemption amount, the entire estate, not just the excess, is subject to New York estate tax. Most states don’t work this way. It catches people, especially business owners with growing companies, off guard.

A business worth $8 million in New York, with a $7.16 million exemption — that’s not $840,000 of taxable estate. That’s $8 million, fully in. At a marginal rate that can hit 16%, the bill gets real fast.

The rules around basis and estate taxes change — and the planning window closes eventually. Let's look at where you stand before it's too late to do anything about it.

For more on how your entity structure affects sale and transfer outcomes, the LLC vs. S-Corp calculator is a good starting point.

This post is for general informational purposes only and does not constitute legal, tax, financial, or estate planning advice. Tax and estate laws are complex and vary by individual circumstance and state. Consult a qualified tax professional or estate attorney before making any planning decisions.