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Selling a Business: Minimizing the Tax Hit

Selling a Business: Minimizing the Tax Hit

29 September 2025: Selling a Business: Minimizing the Tax Hit

Selling a business can be one of the most financially rewarding — and complex — events in an entrepreneur’s life. It is almost certainly the most significant financial one.

While the sale may bring a substantial influx of capital, it can also trigger a large tax liability in the form of capital gains taxes. However, with strategic planning and the right approach, it’s possible to minimize or defer these taxes substantially.

This article outlines key strategies business owners can use to minimize capital gains taxes when selling their businesses, with a focus on legal, financial, and tax planning considerations.

Understand The Basics

Before diving into strategies, it’s important to understand how capital gains tax works.

When you sell a business for more than its adjusted basis (generally the amount you invested in it), the profit is considered a capital gain. Depending on how long you’ve owned the business, the gain may be:

  • Short-term (assets held for less than a year): taxed at ordinary income tax rates.
  • Long-term (assets held for more than a year): taxed at preferential rates, usually 0%, 15%, or 20%, depending on your income level.

For most business owners, the gain is long-term, meaning it’s subject to lower tax rates. However, state taxes, the Net Investment Income Tax (3.8% to fund the money-losing and woefully misnamed Affordable Care Act) and depreciation recapture can significantly increase the total tax liability

Structure the Sale Carefully: Asset Sale vs. Stock Sale

One of the most important decisions in a business sale is whether to structure it as an asset sale or a stock sale.

Asset Sale

In an asset sale, the buyer purchases individual assets (equipment, inventory, goodwill, etc.) of the business. This is common for sales of sole proprietorships, partnerships, and LLCs.

  • For the seller, this may result in multiple tax treatments:
    • Capital gain on certain assets (like goodwill).
    • Ordinary income on others (like inventory or recaptured depreciation).

Asset sales often result in higher taxes for sellers due to this blend of gain types.

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Stock Sale

In a stock sale, the buyer purchases the ownership interest (e.g., shares or membership units) in the corporation or LLC.

  • For the seller, the entire gain is usually treated as a long-term capital gain, resulting in lower taxes.
  • Buyers typically prefer asset sales for tax benefits like stepped-up depreciation.

Strategy: Negotiate for a stock sale, especially if your business is a C-corporation or S-corporation, to ensure the gains are taxed at long-term capital gains rates.

Qualified Small Business Stock (QSBS) Exclusion (Section 1202)

If you’re selling shares in a C-corporation that meets certain criteria, you may qualify for up to 100% exclusion of capital gains under Section 1202 of the Internal Revenue Code.

Requirements for QSBS:

  • The company must be a C-corporation.
  • Shares must have been held for at least five years.
  • The company’s gross assets must have been under $50 million at the time the stock was issued.
  • The company must be actively engaged in a qualified business (most service businesses, banking, and real estate do not qualify).

Benefits:

  • Exclude up to $10 million or 10 times your investment in gain from federal taxes.
  • This exclusion is per taxpayer, meaning you and your spouse may each qualify.

If you qualify, QSBS is one of the most powerful tools for eliminating capital gains tax

Installment Sales

An installment sale spreads the income over several years, allowing you to defer capital gains taxes and potentially stay in a lower tax bracket.

Example:

  • You sell your business and realize a gain of $2 million. The terms of the sale include $400,000 annual payments over five years.
  • Instead of paying tax on $2 million in one year, you pay tax each year on the portion received, possibly avoiding higher tax brackets.
  • Additionally, the outstanding balance will be earning interest.

Caution:

  • Interest may be charged on the deferred portion.
  • If the buyer defaults, you may face financial risk.
  • Installment sales aren’t available for publicly traded stock or sales of inventory.

Still, for private businesses, installment sales can be a useful way to manage tax exposure.

Charitable Remainder Trust (CRT)

A Charitable Remainder Trust (CRT) allows you to sell your business, defer capital gains, and receive income for life (or a fixed term), with the remainder going to charity.

How it Works:

  1. You contribute business shares to a CRT before the sale, even at the closing table.
  2. The CRT sells the shares (no capital gains tax since it’s a tax-exempt entity).
  3. You receive income distributions for life or a term of years.
  4. After the term, the remainder goes to a designated charity.

Benefits:

  • Avoid immediate capital gains taxes.
  • Receive a charitable deduction.
  • Reduce estate taxes.
  • Support a cause you care about.

A similar program is called a Deferred Sale Trust and we’ve discussed that strategy in a previous post. Such strategies work best for high-value sales and those seeking both financial and philanthropic benefits but they are worth considering when selling a business that will result in a gain of $1 million or more.


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Offset Gains with Capital Losses

If you have capital losses from previous investments (stocks, real estate, etc.), you can use them to offset capital gains from the business sale.

For example, if you bought 200 shares of Dollar Tree (DLTR) in May of 2024 and sold those shares a year later (as my wayward cousin did), you’d have a “handsome” loss to offset some of the gain on the sale of your business.

  • You can use dollar-for-dollar capital losses to reduce your gain.
  • Excess losses can be carried forward indefinitely to offset future gains.

Tip: Plan ahead by harvesting losses from other investments in the year of your business sale.

Relocate to a Tax-Free State

That might seem like a drastic idea but if you live in a high-tax state like California, New York, or New Jersey, you might consider the following simple example of a capital gain that comes to us from U.S. Bank’s Wealth Management Department. That page has an in-depth explanation of the impact of capital gains taxes when selling a business:

“The sale of a business usually triggers a long-term capital gain for the seller and federal capital gains taxes will apply. As an example, if you started your business 20 years ago with an investment of $100,000 and sell it today for $10 million, your long-term capital gain is $9.9 million (the selling price minus your original cost basis). A federal capital gains tax of 20% would apply, reducing the net proceeds from the sale to just over $8 million.

“State income tax is also a consideration. For example, residents of California could be liable for a tax of 13.3% on the capital gain. Using the example of the sale above with a capital gain of $9.9 million, the net proceeds to the seller after federal and state taxes would be $6.6 million.”

That’s a hefty hit!! – and would seem to explain why some California business owners relocate to Nevada or Texas before selling (or even before starting) their business!

Consider moving to a no-income-tax state before the sale. All of these qualify:

  • Florida
  • Texas
  • Nevada
  • Tennessee
  • Wyoming
Key Considerations:
  • Establish bona fide residency (typically at least 6 months).
  • Sever ties to your old state (driver’s license, voter reg, etc.)
  • States may challenge your residency, especially for big-ticket sales.

Moving before selling your business could save you 5–13% in state taxes.

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Utilize a 1031 Exchange (in Limited Cases)

A 1031 exchange allows you to defer capital gains taxes by reinvesting the proceeds from the sale into a similar like-kind property.

While 1031 exchanges no longer apply to business goodwill or personal property, they still work for real estate.

Example:
  • Establish bona fide residency (typically at least 6 months).
  • Your business owns a building
  • Sell it and reinvest the proceeds into another like-kind property
  • Defer capital gains tax on that portion of the sale

Partial 1031 exchanges can be useful for businesses with valuable real estate holdings.

Plan Early with Professionals

Tax planning should begin years before you plan to sell. A team of professionals — including a CPA, tax attorney, and financial advisor — can help:

  • Optimize your corporate structure.
  • Identify and apply tax-saving strategies.
  • Ensure compliance with IRS rules.

As with most other aspects of selling a business, early planning is the single most important step in minimizing taxes on a business sale.

The Bottom Line

The sale of a business is almost always the most significant financial event in the life of a business owner – life-changing in most cases – and the tax authorities, voracious consumers of the hard-earned rewards of business owners, will take a substantial cut — unless you plan ahead. By understanding the capital gains tax rules and implementing smart strategies like QSBS exclusion, installment sales, charitable trusts, and timely structuring, you can significantly reduce or defer the taxes owed.

Each situation is unique, so work with qualified professionals to design a personalized exit strategy that meets both your financial goals and your tax efficiency needs.


I owe my success to having listened respectfully to the very best advice, and then going away and doing the exact opposite.

G.K. Chesterton

If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.

I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.

Joe


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The author is the founder, in 2001, of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 1,000 in the world. He can be reached at jo*@*******************og.com

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