Note: This is the sixth part of an eight part series that addresses the key questions that you, as a business owner, need to really focus on as you begin to think about the sale of your business. This series will give you actionable insights on assessing your readiness to sell, what you need to do to be prepared for the process and what real success will look like post sale. Happy reading!
For business owners preparing for an exit strategy, tax planning is one of the most crucial elements of a successful business sale. Without careful planning, you may well lose a significant portion of your sale price to capital gains taxes, ordinary income taxes, and depreciation recapture.
Working with an experienced business broker or investment banker can help you structure the deal strategically to minimize taxes and maximize your net proceeds. Here’s what you need to know.
Capital Gains Tax: The Difference Between Short- and Long-Term Gains
When selling a business, the IRS applies either short-term or long-term capital gains tax rates, depending on how long you’ve held the assets:
- Short-term capital gains apply to assets held for less than one year and are taxed at ordinary income tax rates (up to 37%).
- Long-term capital gains apply to assets held for more than a year and are taxed at a lower rate (0% to 20%).
Strategy Tip: Holding assets for at least one year before selling can significantly reduce your tax burden. If you’re close to the one-year mark, delaying the sale could mean paying a lower tax rate.
Business Sale Structure: Asset Sale vs. Stock Sale
How you structure your business sale—asset sale vs. stock sale—affects both tax treatment and buyer interest.
- Asset Sales (preferred by buyers) allocate the purchase price to individual assets, triggering ordinary income tax on depreciated assets.
- Stock Sales (preferred by sellers) typically qualify for long-term capital gains treatment, reducing the seller’s tax burden.
Strategy Tip: If a buyer insists on an asset sale, negotiate to allocate more value to goodwill and intangible assets, which qualify for capital gains treatment.
Tax Deductions and Offsets to Reduce Your Tax Liability
Proper planning allows business owners to use deductions and credits to offset taxable gains, including:
✔ Transaction Costs – Broker fees, legal fees, and advisory services may be deductible.
✔ Net Operating Losses (NOLs) – Past business losses may offset capital gains.
✔ Installment Sales – Spreading payments over time can reduce your tax bracket exposure.
Strategy Tip: Work with a business broker and tax advisor to optimize deductions and identify tax-saving opportunities.
Advanced Tax Strategies for Business Owners
To further reduce your tax burden, consider these advanced strategies:
✔ Installment Sales – Accept payments over time to spread out tax liability.
✔ Charitable Remainder Trusts (CRTs) – Donate part of the sale to reduce capital gains tax while creating ongoing income.
✔ Qualified Small Business Stock (QSBS) Exclusion – If you own a C-Corp and meet IRS criteria, you may exclude up to 100% of capital gains on the sale.
Planning Beyond the Sale: Wealth & Estate Considerations
Your business exit strategy should align with your long-term financial goals. After a sale, consider:
✔ Estate Planning – How will your heirs be impacted by estate taxes?
✔ Retirement Planning – Where will you invest proceeds for wealth preservation?
✔ Tax-Advantaged Investments – Can you reinvest in Qualified Opportunity Zones to defer capital gains taxes?
Strategy Tip: Include a wealth management professional as part of your deal team. Don’t wait until after the deal is done.
Work With an Expert to Maximize Your After-Tax Proceeds
Selling a business isn’t just about finding a buyer—it’s about structuring the deal to protect your wealth. Working with an investment banker or experienced business broker ensures you negotiate the best deal while implementing tax-efficient strategies to keep more of your hard-earned money.
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