When it comes to selling your business, one of the most critical—but often underestimated—factors is the tax impact. The structure of the deal, how your business is owned, and the timing of the sale all play significant roles in determining how much you’ll ultimately keep in your pocket after taxes.
As a CPA who specializes in working with business owners on exit strategies, I help clients understand the tax implications upfront, so they can make informed decisions and avoid unpleasant surprises at closing.
Here are some key considerations:
Asset Sale vs. Stock Sale
The structure of the sale has a major effect on your tax liability:
- Asset Sale: Most small business sales are structured this way. You’re selling the business’s individual assets (equipment, inventory, goodwill, etc.), and each one may be taxed differently. For example, equipment may generate ordinary income due to depreciation recapture, while goodwill is typically taxed at capital gains rates.
- Stock Sale: In a stock sale, you sell your ownership interest (shares) in the business entity. This often results in capital gains treatment across the board and can be more tax-favorable for sellers. However, buyers often prefer asset sales for liability protection and depreciation benefits.
I help clients analyze both options and work with legal counsel to structure the deal in a way that aligns with their financial and exit goals.
Federal and State Capital Gains Tax
When you sell a business asset or equity interest, the capital gains tax kicks in on the appreciated value. The federal long-term capital gains rate is typically 15% or 20%, depending on your income level. Many states also impose their own capital gains taxes, which can range significantly.
It’s critical to estimate your net proceeds after tax, so you know what you’ll actually walk away with—and can plan accordingly for retirement, reinvestment, or estate planning.
Depreciation Recapture
If you’ve taken depreciation deductions on business assets, you may face recapture taxes when those assets are sold for more than their depreciated value. This portion of the gain is typically taxed at ordinary income rates, not capital gains rates—another reason thoughtful planning is so important.
Installment Sales and Timing Strategies
In some cases, structuring your sale as an installment sale—where payments are received over several years—can help spread out your tax liability. This may reduce your tax bracket in any given year and improve overall cash flow.
The timing of your sale (e.g., closing before year-end vs. after) can also affect your tax bill. I work closely with clients to model different scenarios and identify the most tax-efficient timeline.
Qualified Small Business Stock (QSBS) Exclusion
If you own a C corporation that qualifies under Section 1202 of the Internal Revenue Code, you may be eligible to exclude up to 100% of the gain on the sale of qualified stock—up to $10 million or 10 times your basis, whichever is greater. This is a powerful tax planning tool, but eligibility rules are strict, and the business must meet specific criteria, including being a U.S. C corporation with less than $50 million in assets at issuance, operating in a qualified trade or business, and the stock must be held for at least five years. The exclusion applies only to non-corporate taxpayers, and the percentage of gain excluded depends on when the stock was acquired.
QSBS Tax Exclusion—Rhode Island and Massachusetts:
- Rhode Island: Fully conforms to the federal QSBS exclusion, allowing qualifying taxpayers to exclude gains at the state level if they meet the federal requirements.
- Massachusetts: Does not fully conform to the federal QSBS exclusion and may impose additional requirements, such as in-state business operations, for any state-level exclusion. Consult a tax professional for specific guidance.
Planning Ahead is Key
The earlier we begin tax planning for your exit, the more flexibility you’ll have to:
- Optimize the sale structure
- Reduce overall tax liability
- Maximize your after-tax proceeds
- Avoid costly surprises
In many cases, strategic planning 1–2 years before your intended exit date can save you significant money and headaches.
Final Thoughts
Selling your business is one of the most important financial decisions you’ll make. Taxes are an unavoidable part of that process—but with smart planning, you can control how much you owe and how much you keep.
If you’re thinking about selling or want to better understand the tax impact of a future exit, let’s talk. I’d be happy to walk through your options and help you build a strategy that works for your goals.
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This article was written with the aid of artificial intelligence and reviewed for accuracy and clarity.