"QSBS-style capital gains exclusion for long-term, onshore manufacturing succession — preserving local capability and rewarding patient ownership."
Summary
An estimated 125,000 U.S. manufacturing firms owned by baby boomers employ approximately 2.6 million workers and anchor local supply chains. MICA creates a QSBS-style capital gains exclusion under new IRC Section 1202A for long-term, onshore ownership transitions. It rewards patient, onshore owners while discouraging high-leverage strip-and-flip models and offshoring. The current QSBS framework (Section 1202) provides 100% capital gains exclusion to technology startups but effectively excludes most manufacturers through C-corp-only eligibility, gross asset caps unsuitable for capital-intensive industries, and original issuance requirements that prevent application to generational transfers.
How It Works
A qualifying manufacturer (NAICS 31–33, ≥40% domestic value-added on a 3-year average, <2,500 employees, privately held at acquisition) can sell their business interest with 100% capital gains exclusion up to $250M (inflation-adjusted). The seller must hold for 10 years, or the business must complete a qualified public offering (IPO or direct listing on a national securities exchange). Holding periods tack for inherited interests, gifts, and divorce transfers. If the buyer violates guardrails within the 7-year recapture period — excessive leverage (debt >5× EBITDA), offshoring (>30% of production), employment reduction (below 50%), or early resale (within 5 years) — the tax benefit is recaptured from the buyer with interest. Post-IPO sales are exempt from recapture. Acquirers must file annual compliance reports during the recapture period.
Key Features
- 100% exclusion of qualifying capital gain (up to $250M per company, inflation-adjusted)
- 10-year holding period requirement (or completion of a qualified public offering/IPO)
- Tacking for inherited interests, gifted interests, and transfers incident to divorce
- Transitional rule for inherited interests from decedents dying within 10 years of enactment
- Buyer-side recapture if guardrails violated within 7-year recapture period
- Recapture triggers: early disposition within 5 years, net debt >5× EBITDA, offshoring >30% of production, employment reduction below 50%
- Proportional allocation of per-business cap among multiple sellers
- No excessive leverage — limits usual private equity asset stripping
- Applies to C-corps, S-corps, partnerships, LLCs, and sole proprietorships
- DVA requirement of ≥40% (3-year average) and <2,500 employees
- Pass-through entity rules for tiered partnerships and complex ownership structures
Why It Matters
Manufacturing succession is a scale problem: millions of workers and thousands of local supply chains depend on successful transitions. Today, a SaaS company with minimal assets gets full QSBS tax exclusion. A precision manufacturing company with 200 employees and critical defense capabilities gets nothing. Section 1202's requirements effectively exclude most manufacturing businesses due to entity structure limitations, gross asset caps unsuitable for capital-intensive industries, and original issuance requirements that prevent application to generational transfers. The absence of comparable tax treatment encourages value-extraction through high-leverage acquisitions, asset stripping, production offshoring, and workforce dispersal. MICA levels the playing field by extending capital gains relief to qualifying domestic manufacturing businesses with appropriate guardrails ensuring long-term ownership and operational continuity.