Selling your business isn’t just about the sale price, it’s about what you keep after taxes. The IRS may treat parts of your proceeds as capital gains and others as ordinary income. State taxes and depreciation recapture can shrink your profit even more.
Early tax planning is key to preserving your profit!
Tax Implications of a Business Sale
A business sale often triggers four main tax categories:
- Long-term capital gains tax is imposed on intangible assets like goodwill or capital assets like real estate and business stock.
- Short-term capital gains are taxed as ordinary income on items like inventory or depreciation recapture.
- Depreciation recapture which is taxed at higher rates for previously written-off assets.
- State and local taxes vary by location and business structure.
Understanding how each tax consideration applies to your stock or asset sale is the first step to minimizing the impact.
Legal Entity & Deal Structure Strategies
These strategies shape your overall tax burden by changing how the business is legally organized and sold. To learn more about the nuances of the following three strategies, see our articles: 8 Must-Know Tax Implications of Selling a Business and Tax Implications of Mergers and Acquisitions Explained.
Choose the Right Entity Type Before Selling
Your legal structure directly affects how the IRS taxes your gain. If you’re planning to sell, reviewing your entity type in advance could lead to major tax savings.
Pro Tip: Buyers, review your tax structure early. Waiting until negotiations can cost you leverage and money. Plan ahead with business structuring advisory services for a tax-efficient exit.
Use a Stock Sale to Minimize Capital Gains Tax
Stock sales don’t just simplify reporting, they can also cut your tax bill. In a stock sale, you pay long-term capital gains tax rates and avoid depreciation recapture that is taxed at higher ordinary income tax rates.
To help close the deal, sellers often offer indemnity protections or adjust pricing on certain assets.
Allocate Purchase Price Strategically in an Asset Sale
The way you split the purchase price across business assets in an asset sale shapes your tax outcome. Certain allocations can reduce capital gains tax, while others may increase ordinary income tax exposure.
Buyers typically want more value on assets they can depreciate. To protect your position, work with a tax advisor to guide negotiations and support defensible allocations that align with IRS fair market value rules.
Federal Exclusion Strategy
This tactic reduces or eliminates federal capital gains tax when specific IRS conditions are met.
Use Section 1202 to Avoid Capital Gains Tax
Section 1202 may let you exclude up to 100% of the gain and avoid paying capital gains tax entirely if your business qualifies as a Qualified Small Business. This powerful tax break rewards long-term investment in certain C corporations. Read our Qualified Small Business Stock Overview to learn about the eligibility rules.
Risk: Misclassifying eligibility or missing the holding period can disqualify the exclusion. Confirm QSBS status with a tax advisor well before entering a sale.
Timing & Deferral Strategies
These strategies delay when taxes are triggered, helping you manage cash flow and potentially lower your total tax bill.
Use Tax Loss Harvesting to Offset Capital Gains
Strategically timing your business sale in a year when you realize investment losses may help offset capital gains and reduce your tax bill. This approach requires careful coordination between your investment and business sale plans. Consulting a tax professional will help you structure both events for maximum savings.
Defer Taxes With an Installment Sale
Installment sales let you spread capital gains tax over time by receiving payments in multiple tax years. You’re taxed only on the gain in each payment, which may keep you in a lower bracket.
This method works best when seller financing is involved. However, it may trigger interest income, depreciation recapture, and higher audit risk.
Risk: If the buyer defaults, you could face unexpected tax and cash flow consequences.
Use a Deferred Sales Trust (DST)
Like installment sales, DSTs allow for deferral but with added flexibility and estate planning potential. A DST lets you sell your business through a third-party trust. The trust sells the business, and then pays you over time using an installment note, which spreads tax liability across future years.
You control the payment timeline, and any unused assets may pass to your heirs. DSTs offer tax deferral while preserving control over sale proceeds.
Risk: DSTs are complex and closely scrutinized by the IRS. Improper setup may trigger immediate tax.
Use a 1031 Exchange to Defer Tax on Business Property
A 1031 like-kind exchange lets you defer capital gains taxes by rolling the money from selling your business or investment property into another similar property. Only real property qualifies, not equipment, inventory, or personal-use assets.
Business owners must identify replacement property within 45 days and complete the exchange within 180 days. A qualified intermediary must hold the sale proceeds, meaning you can’t receive them directly.
Risk: Receiving boot (cash or non-qualifying assets) creates immediate taxable income.
Reinvest in Qualified Opportunity Zones
Reinvesting your sale proceeds into a Qualified Opportunity Fund (QOF) within 180 days lets you defer capital gains tax. Taxes are postponed until the end of 2026 or when you sell the QOF investment, whichever comes first. If held for 10+ years, future appreciation on the QOF investment could be completely tax-free.
Risk: Failing to meet QOF requirements or investing in underperforming funds may reduce the benefits.
Use a Charitable Remainder Trust (CRT)
A CRT lets you transfer business interests to a trust before the sale. The CRT sells the business tax-free, pays you income for life or a fixed term, and donates the remainder to charity.
You also receive an immediate partial charitable deduction. CRTs come in two forms:
- CRUT: Pays a percentage of trust assets annually.
- CRAT: Pays a fixed annual dollar amount.
Risk: CRTs are irrevocable and complex. Once funded, the assets can’t be reclaimed or redirected.
State-Level Tax Reduction Strategies
State-level tax strategies vary based on where you live or where your trust is located. Because each state has its own rules, working with a qualified tax or legal advisor is essential to avoid unexpected costs.
Move to a No-Income-Tax State Before the Sale
Relocating to a no-income-tax state like Florida, Texas, or Nevada before a sale may help reduce or eliminate your state capital gains tax. For residents of high-tax states like California or New York, the potential savings could exceed 13% of the gain.
To qualify, you must move permanently before the sale and update your key address records. Some states aggressively audit exits, so your paper trail must be airtight.
Example: A $5 million gain taxed at California’s 13.3% rate equals $665,000 in state tax. A valid move could erase that bill.
Use a Non-Grantor Trust to Avoid State Capital Gains Tax
Creating a non-grantor trust in a no-tax state allows the trust, not you, to own and sell the business. If structured at least two years before the sale of a business, gains are taxed in the trust’s state of residence.
This strategy works well for owners in high-tax states like California or New York. Delaware and Nevada are common trust locations.
Risk: Some states now challenge or restrict this tactic. It requires careful planning and timing to hold up under audit.
Wealth Transfer & Succession Strategies
These strategies reduce estate taxes and support long-term succession planning.
Implement Gifting Strategies
You can reduce taxes by shifting part of your business to a trust or family member before the sale. This freezes the gifted portion’s value for estate tax purposes. When the sale closes, appreciation on the gifted shares escapes estate tax because it’s no longer part of your estate.
Example: You gift 30% of your company to a trust while it’s worth $5 million. If the company later sells for $8 million, the appreciation on that 30% ($900,000) avoids estate tax.
You may be able to apply valuation discounts if the gifted shares lack control or can’t easily be sold. That lets you transfer more ownership while using less of your lifetime gift exemption. After the sale, the trust can use the proceeds to fund your family’s long-term wealth goals.
Explore Employee Stock Ownership Plans (ESOPs)
Selling to an ESOP checks a lot of boxes. You get a potential tax deferral, a built-in exit plan, and a way to reward the team that helped grow the company. If you own a C corp and sell at least 30% of your shares, Section 1042 may let you defer capital gains tax if you reinvest in Qualified Replacement Property.
S corps don’t qualify for that deferral, but there’s a major upside! If the ESOP ends up owning 100% of the company, it typically doesn’t pay federal income tax. That means serious long-term savings.
ESOPs are more than a tax strategy, they’re a succession plan. You can gradually step back while giving employees ownership, which often boosts morale, loyalty, and retention.
Heads-up: ESOPs take time, money, and expert support to set up right. They work best for healthy companies with reliable cash flow and strong leadership in place.
Professional Support & Preparation
Tax-smart business sales start with the right team and early preparation.
Work With a CPA Who Specializes in Business Sales
Selling a business triggers tax consequences that most general tax preparers aren’t equipped to handle. From deal structure and purchase price allocation to QSBS qualification and installment sale modeling, every detail affects your tax outcome. You need a CPA with transaction expertise, not just compliance skills.
Our specialist team of CPAs offers transaction advisory services tailored to business sales. We support negotiations, reduce tax exposure, and ensure compliance from entity review through post-sale reporting.
Start Planning at Least 12–24 Months in Advance
Early planning opens the door to better tax outcomes. It also helps you avoid compliance issues and costly delays.
Clean up your books, resolve red flags, and review your entity type before listing the business. Buyers will scrutinize your financials. Any issues may reduce your sale price or disqualify you from tax breaks.
Get CPA Guidance to Slash Your Tax Liabilities
Selling a business is a major tax event. Without strategic planning, you could lose hundreds of thousands to avoidable taxes. The right tax strategies protect your gains and support your long-term financial goals.
Every business sale is different. Tax rules, structure, and timing all affect your outcome. Partner with a CPA specializing in business sales to navigate complex tax strategies and secure a more profitable exit.
