Taxes can quickly erode the gains from selling a business if left unplanned. Many owners overlook tax strategies that could save them thousands or even more. Selling a business is already complex, and without the right tax approach, a significant portion of your hard-earned profits can slip away. This article will guide you through key tax planning strategies for selling a business, helping you keep more of what you have worked so hard to build.
The insights shared here come from expert business brokers and M&A advisors with years of experience guiding owners through successful sales.
Choosing the Right Sale Structure Can Cut Tax Bills
One of the first decisions in the sale process is deciding how to structure the transaction. The main options are an asset sale or a stock sale. An asset sale involves the buyer acquiring selected assets and assuming certain liabilities of the business, whereas a stock sale shifts ownership by transferring the company’s shares to the buyer.
An asset sale often results in higher taxes for the seller because gains from assets may be taxed at different rates. Depreciation recapture, for instance, can trigger ordinary income tax rates, which are higher than capital gains rates. Stock sales typically benefit sellers with lower capital gains tax rates but may require more complex negotiations with buyers.
Choosing the structure that aligns with the seller’s tax situation is one of the most effective tax strategies for selling a business. Sometimes, splitting the sale into a mix of asset and stock portions is possible, which may optimize tax results.
Timing the Sale for Tax Advantages
The timing of a sale can influence tax liability. The tax code changes often, and selling before or after certain tax law updates can impact the amount owed. For instance, long-term capital gains tax rates apply only if the asset was held for more than one year. Sellers who time the sale to qualify for long-term rates may save a substantial amount.
Selling near the end of a tax year can allow some flexibility in managing income and deductions. Sellers can consider delaying receipt of part of the payment into the following tax year to spread out income and reduce the tax burden in a single year.
Another timing tactic involves evaluating state tax implications. Some states have higher capital gains taxes than others, so adjusting the sale timing or location can help.
Utilizing Installment Sales to Defer Taxes
An installment sale lets the seller receive payments over multiple years instead of a lump sum. Spreading payments delays recognizing all the gains at once, thus lowering the immediate tax hit. This approach works well if the buyer agrees to finance part of the purchase price.
Installment sales provide a steady income stream and tax deferral. However, interest income must be reported on the payments. Still, deferring gains over time can improve cash flow and tax planning opportunities. It remains a top choice among tax-saving strategies when selling a business.
Capital Gains Exclusions and Exemptions Can Lower Taxes
Qualified small business stock (QSBS) may qualify for capital gains exclusions under certain conditions. If the business meets specific requirements, a seller may exclude up to $10 million or 10 times the adjusted basis in the stock from capital gains tax. This can be a powerful tax planning strategy when selling a business.
Additionally, Section 1202 of the Internal Revenue Code offers exclusions for gains on qualified small business stock held for over five years. Experienced business brokers can help determine eligibility.
Other exemptions might include rollover relief or special provisions for family-owned businesses. Identifying these possibilities early helps apply them to the transaction.
Leveraging Retirement Accounts and Tax-Deferred Vehicles
Using retirement accounts during the sale process can reduce taxable income. Business owners with funds in tax-deferred retirement plans can strategically withdraw or roll over proceeds to manage tax exposure.
For example, a portion of the sale proceeds can be directed into an IRA or 401(k) rollover, delaying taxes until distributions begin. This approach requires careful planning to comply with IRS rules and contribution limits.
Similarly, opportunity zone investments allow sellers to defer and reduce capital gains taxes by investing proceeds in designated zones. This strategy demands attention to deadlines and investment qualifications but can significantly reduce taxes.
Deducting Business Expenses and Sale-Related Costs
Many expenses related to preparing and executing the sale are deductible. Costs such as legal fees, brokerage commissions, accounting, and advisory services reduce the taxable gain. Careful tracking of these expenses maximizes deductions.
Some improvements or repairs made to increase the business value before sale can add to the basis, lowering capital gains. Accurate documentation supports these deductions.
Properly allocating expenses against income lowers the tax bill, which makes attention to detail vital during the selling process.
State and Local Tax Considerations Matter
Business sales often involve taxes beyond the federal level. State and local taxes can vary widely, and some states do not tax capital gains at all. Others may have high rates or special rules.
Sellers should research the tax rules in the business’s location and any other relevant jurisdictions. Sometimes, relocating the business or holding the sale in a different state might offer tax advantages.
Local transfer taxes or sales taxes may also apply depending on the business type and assets involved. Including these in planning helps avoid surprises.
Gift and Estate Tax Planning Around the Sale
For owners looking to transition wealth to family members, gift and estate tax strategies become important. Transferring portions of the business as gifts before the sale can reduce the estate size and potential estate taxes.
Annual gift tax exclusions and lifetime exemption amounts provide tools for minimizing tax exposure. Owners might also consider trusts or other legal arrangements. Coordinating the sale with estate planning strategies allows a smoother transition and less tax drag on the inheritance.
Arizona’s Top Business Brokers and M&A Advisors
Selling your business is a major decision. At Strategic Business Brokers Group, we combine over 35 years of experience to help business owners in Arizona navigate the selling and buying process confidently. Our expert brokers specialize in confidential sales, valuations, and mergers & acquisitions for small to mid-sized businesses. We work closely with individual investors, private equity groups, and owners to achieve successful, smooth transactions.
With more than 340 deals closed and over $205 million in sales volume, our trusted team offers personalized guidance every step of the way. Contact us today to start your journey with seasoned professionals who put your goals first.
