How to Sell a Business Without Getting Crushed by Capital Gains Taxes

Are you thinking of selling your company but worried that capital gains taxes could significantly reduce your profit? If so, it’s important to understand the tax rules that apply to business sales and the strategies available to potentially reduce your overall tax burden. The more you know about options such as installment sales and other tax-efficient planning tools, the better positioned you’ll be to structure a tax-optimized business sale and preserve more of the proceeds from your hard work.

What Are Common Mistakes That Trigger Higher Taxes When Selling a Business?

Several errors during the sale process can result in avoidable taxes, including:

• Failing to understand the full range of tax consequences, including federal capital gains tax, depreciation recapture, net investment income tax (NIIT), and any applicable state or federal estate taxes
• Improperly allocating the purchase price among business assets, which can unintentionally increase ordinary income or recapture taxes
• Skipping a proper business valuation can lead to inaccurate tax assumptions and poor timing decisions
• Not planning far enough in advance, especially regarding entity structure, depreciation, and strategies that must be implemented before a sale
• Overlooking legitimate tax-planning strategies, such as installment sales, Section 1202 (for qualifying small-business stock), and other tax-deferral or mitigation tools

Can an Installment Sale Help You Minimize Taxes on a Business Sale?

Yes — in the right circumstances, an installment sale may help reduce capital gains tax on the sale of a business. That’s because it allows you to defer and spread out capital gains taxes over multiple years.

Under IRS rules, an installment sale allows a seller to receive at least one payment after the tax year of the sale. The gain is then recognized proportionally as payments are received, which can:

• Lower the seller’s taxable income in any one year
• Reduce exposure to higher tax brackets
• Potentially limit NIIT liability

An installment sale does not eliminate long-term capital gains taxes. It defers them and may reduce the effective rate depending on the seller’s income in the years payments are received.

Structured installment sales can offer additional planning advantages, but they must be properly structured to comply with IRS rules. Discuss business-sale tax strategies with a knowledgeable attorney at 453 Trust Powered by Pennington Law to ensure proper implementation.

How Are Capital Gains Taxes Calculated When Selling Your Company?

The sale of a business can trigger capital gains taxes when business assets have appreciated during the seller’s ownership. A business sale is typically treated as a sale of individual assets unless it qualifies for and is structured as a stock sale. The tax consequences differ substantially depending on the structure.

Types of Capital Gains Taxes

• Short-term capital gains: Assets held less than one year; taxed at ordinary income rates
• Long-term capital gains: Assets held one year or more; taxed at 0 percent, 15 percent, or 20 percent, depending on taxable income

Assets Typically Encountered in a Business Sale

The IRS requires the tax consequences to be determined asset by asset. Common categories include:

• Investment assets – Marketable securities held by the business, etc.
• Inventory – Taxed as ordinary income
• Accounts receivable – Ordinary income for cash-basis taxpayers
• Machinery, equipment, and real estate – Subject to depreciation recapture rules
• Intangible assets – Trademarks, patents, copyrights, etc.
• Goodwill – Generally taxed as long-term capital gain if held for more than one year

A purchase agreement must allocate the sale price across these assets. Because different asset types are taxed differently — ordinary income vs. capital gain vs. depreciation recapture — the allocation can substantially affect the total tax owed.

For guidance tailored to your situation, consult an attorney familiar with tax planning strategies for business owners.

Learn How to Sell Your Business Without Excessive Capital Gains Taxes — Talk to a 453 Trust Attorney

Before selling your business, speak with an experienced lawyer at 453 Trust Powered by Pennington Law. We can help you understand available tax-efficient strategies, evaluate the tax implications of a sale, and implement techniques to manage capital gains taxes.

Contact us today for a free initial consultation. Let’s discuss how you can structure your sale strategically and retain more of what you’ve earned.