Business Planning · Tax Planning

Selling Your Business: The Tax Decisions to Make Before the Buyer Shows Up

Most owners spend decades building a business and a few months selling it. The taxes on selling a business are often the single largest cost of the deal, and nearly every lever that reduces them has to be pulled before you sign a letter of intent. After that point the structure is set, the price is allocated, and your options narrow to filing the return.

Here are the decisions that matter most, whether you are two years out or fielding an offer this fall.

Asset sale or stock sale?

Buyers generally prefer asset purchases; sellers generally prefer stock sales. That tension drives much of the tax outcome in a small business sale.

In an asset sale, the buyer acquires the equipment, inventory, customer relationships, and goodwill, receives a new tax basis for future depreciation or amortization, and avoids unknown liabilities. In a stock sale, or the sale of LLC interests, the buyer takes the entity as it stands, while you generally recognize one long-term capital gain, except for any portion of an LLC interest sale attributable to "hot assets" such as inventory and depreciated equipment, which is taxed as ordinary income.

If your company is an S corporation or an LLC, an asset sale is usually workable, because the gain passes through to you once. It simply arrives in pieces, some taxed as capital gain and some as ordinary income, which is where the allocation below comes in.

If your company is a C corporation, an asset sale is taxed twice: once inside the corporation and again when you take the cash out. Sellers in that position look hard at a stock sale, at documenting personal goodwill that belongs to the owner rather than the corporation, and at the qualified small business stock rules. For stock issued after July 4, 2025, those rules can exclude 50% of the gain after three years, 75% after four, and 100% after five, up to a $15 million cap. Only original-issue C corporation stock qualifies, and many service and hospitality businesses are excluded, so this is a decision made years before a sale, not months.

The allocation is where the tax is actually decided

In an asset sale, the price gets split across asset categories on IRS Form 8594, and both sides must report matching numbers. Each asset is valued at what it is actually worth first. Goodwill only gets what is left over, not whatever either side wants to put there.

There is still room to negotiate, since assets rarely have one exact value. You want more in goodwill, taxed as capital gain; the buyer wants more in equipment and inventory, which can be written off faster. But it has to be realistic. The IRS can challenge allocations that are not backed by real value, for either side.

Because both parties file the same numbers, settle this in the letter of intent, not the week before closing.

One trend raises the stakes. Owners who expensed equipment with 100% bonus depreciation have little or no tax basis left in it, so every dollar the buyer allocates there comes back as ordinary income.

Installment sale: spread the gain, and the tax

If you carry part of the price as a note, you can generally report the gain as the payments arrive rather than all in the year of closing. For an owner heading into retirement, that can mean staying in the 15% capital gains bracket instead of 20%, and keeping income below the thresholds where the $6,000 senior deduction phases out and Medicare premium surcharges begin.

Three cautions. Depreciation recapture is taxed in the year of sale no matter how you are paid. You become the buyer's lender, so the note needs real security behind it. And the note must carry a stated interest rate, because the IRS will impute one if it does not. Installment terms are common when selling to a key employee or a family member.

Capital gains rates are not the whole bill

Federal long-term capital gains are taxed at 0%, 15%, or 20% depending on total income, and the year you sell usually lands in the top tier. Two more layers deserve a place in the plan:

• The 3.8% net investment income tax generally does not apply to gain from a business you actively run, but it often does apply to rental real estate and investment assets sold with it.
• Arizona taxes the gain at its flat 2.5% rate and allows a subtraction equal to 25% of net long-term capital gains on assets acquired after 2011. Not every asset in a sale qualifies, so the allocation matters at the state level too.

If you converted from a C corporation to an S corporation within the last five years, ask about built-in gains tax before you sign anything.

Gifts and charity: the timing decides everything

Two strategies can save real money, and both stop working the moment there is a binding agreement.

• Gifting ownership interests to children or a trust before the sale shifts future gain to them and moves the appreciation out of your estate. With the federal estate exemption now $15 million per person, this is usually an income tax strategy first, but for larger family businesses it is still both. The mechanics, from the annual exclusion to the lifetime exemption, are in our guide to gifting.
• Donating a slice of the company to a donor-advised fund or charitable remainder trust before the sale can produce a fair market value deduction, and the gain on that slice is never taxed to you. Done after the deal is locked, the IRS treats it as if you sold first and gave cash. A charitable remainder trust can also turn part of the proceeds into lifetime income, which is a retirement conversation as much as a tax one.

What about the building?

If you own the real estate, you have three paths, and they are taxed very differently:

• Sell it with the business and pay up to 25% on prior depreciation with capital gains rates on the rest.
• Keep it and lease it to the buyer, creating retirement income and preserving a step-up in basis for your heirs.
• Sell it separately and roll it into other real estate through a 1031 exchange, deferring the gain. We covered the tradeoffs in 1031 Exchanges: Should the Tax Tail Wag the Investment Dog?

A simple timeline

• Three or more years out: settle the entity question, separate the real estate from the operating company, and clean up the books. Buyers pay for clarity.
• Twelve months out: get a business valuation of the operating company, make any family gifts, and decide whether a large retirement plan contribution belongs in your final high-income years.
• Before the letter of intent: negotiate the allocation, settle installment terms, and complete any charitable transfers.
• The year of closing: estimated taxes, health coverage if you are under 65, since a high-income year can change your ACA premium credits, and a decision on how long to hold any buyer stock you received as part of the price, which raises the same questions as any concentrated stock position. Then a plan for what the proceeds need to do for the rest of your life.

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