How to Minimize Your Tax Liability When Selling a Business
Key Takeaways
- How your deal is structured significantly affects how much of the purchase price you actually keep
- Capital gains treatment is generally much better than ordinary income — and deal structure determines which applies
- This conversation needs to happen before the LOI is signed, not after
- A few thousand dollars in tax planning can be worth hundreds of thousands in after-tax proceeds
You've spent years building your business. When you sell it, how much of the proceeds you actually keep depends significantly on how the deal is structured.
The capital gains vs. ordinary income question
The biggest tax question in most business sales is how proceeds are classified. Long-term capital gains are taxed at 0%, 15%, or 20% depending on your income. Ordinary income is taxed at your marginal rate, which can be significantly higher.
In an asset sale, different assets get allocated to different categories — some taxed as capital gains, some as ordinary income. Goodwill is generally taxed as capital gains. Equipment can trigger ordinary income through depreciation recapture. The allocation negotiation directly affects your after-tax proceeds.
Installment sales
If spreading the tax liability over multiple years works in your favor, an installment sale may make sense. You receive payments over time and only pay tax on each payment as you receive it — which can prevent you from being pushed into a higher bracket in the year of the sale. The risk: you're providing financing to the buyer.
Qualified Opportunity Zones and charitable strategies
For sellers with large capital gains, additional strategies worth discussing with your tax advisor include investing in Qualified Opportunity Zone funds and charitable remainder trusts. Not right for everyone, but worth understanding before closing.
The bottom line
Get your CPA and your M&A advisor talking to each other before you go to market. The deal structure you accept will determine your after-tax proceeds. Optimize that before the LOI, not after.
We coordinate with your tax advisors as part of every engagement.
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