What we handle
The tax issues PE-backed software companies face
Structure comes first. Funds often invest through a C corporation or a holding LLC with a corporate blocker, and the choice drives everything else: whether founders' shares qualify for the section 1202 QSBS exclusion, how management incentive units or profits interests are taxed, and whether a later sale is a stock or asset deal. Converting an LLC to a C corporation before the investment can start the QSBS clock, and for stock issued after July 4, 2025 the exclusion phases in at 50%, 75% and 100% after three, four and five years, up to $15 million per shareholder per company.
Software development is research for tax purposes. Starting in 2025, domestic research and development costs, including developer salaries, can again be deducted immediately under section 174A, while work performed by offshore teams must still be amortized over 15 years. Smaller companies may be able to recover deductions from 2022 to 2024 through time-limited elections. The research credit adds a dollar-for-dollar benefit, and an early-stage company with under $5 million of receipts can use up to $500,000 a year against payroll taxes.
Each financing round matters for losses. A change of more than 50% in ownership by 5% shareholders over three years triggers section 382, which caps how much of the company's net operating losses can be used each year, so loss models should be updated after every round. Other recurring issues: 409A valuations for option grants and 83(b) elections within 30 days for restricted founder stock; sales tax on SaaS, which some states tax and others do not; payroll and income tax nexus created by remote employees in many states; transfer pricing and foreign reporting for development teams abroad; capitalizing deal costs, with the 70% safe harbor for success-based fees; and section 280G golden parachute rules, which private companies can often address through a 75% shareholder vote.
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