How to Reduce Taxes When Selling a Business

Most sellers spend years building a business and about three weeks thinking about taxes before they sell.

That is the wrong order of operations. And it costs them real money.

The tax structure of your deal can swing your net proceeds by hundreds of thousands of dollars. A $2M sale that is structured poorly can net you less than a $1.6M sale that is structured well. The difference is not luck. It is decisions made before the LOI is signed, not after. By the time most sellers sit down with their accountant, the biggest levers have already been pulled by the buyer’s side.

Here is what buyers know about deal taxes that most sellers find out too late.

Why Tax Planning Before the Sale Is Non-Negotiable

By the time you are reviewing a purchase agreement, most of the major tax decisions have already been locked in.

The structure of the deal, how assets are allocated, whether it is an asset sale or a stock sale, whether there is a seller note involved, whether an earnout is on the table: all of these choices carry tax consequences that compound on each other. Change one variable late in the process and you may be renegotiating with the buyer from a weak position. We have seen sellers realize this mid-closing, and at that point your options shrink fast.

From what we see across the deals we underwrite, sellers who engage a CPA with M&A experience three to six months before going to market consistently net more than sellers who engage one after the LOI is signed. The math is simple. Pre-sale planning gives you time to act. Post-signing planning gives you time to complain.

So the practical answer to how to reduce taxes when selling a business starts before you ever talk to a buyer. Tax reduction is not a closing-table exercise. It is a pre-sale strategy, and the sellers who treat it that way walk away with meaningfully more money.

Asset Sale vs. Stock Sale: The Tax Structure That Matters Most

This is the single biggest tax decision in any business sale. And buyers and sellers almost never want the same thing.

In an asset sale, the buyer purchases the individual assets of the business: equipment, inventory, customer relationships, goodwill. This is what most SBA-financed deals look like, because SBA lenders require it for collateral and lien purposes.

In a stock sale (or membership interest sale for LLCs), the buyer purchases your ownership stake. The business entity transfers as-is.

Here is why this matters for taxes.

Asset sale taxes for the seller: - Different asset classes get taxed at different rates. Equipment and fixtures depreciated below book value trigger ordinary income tax on the recaptured depreciation (up to 37%). - Goodwill (the intangible value of the business above hard assets) is typically taxed at long-term capital gains rates, anywhere from 0% to 20% depending on your income. - Most small business asset sales end up as a blend: some ordinary income on recaptured depreciation, capital gains on goodwill.

Stock sale taxes for the seller: - The entire purchase price is typically taxed at long-term capital gains rates, provided you have held the stock for over a year. - For a seller in the 20% capital gains bracket, the difference between an asset sale and a stock sale on a $2M deal can easily be $80K to $150K.

That is not a rounding error. That is a house down payment.

Buyers prefer asset sales because they get a stepped-up basis on the assets, which reduces their future taxable income. Sellers prefer stock sales because of the preferential capital gains treatment. In SBA-financed acquisitions (which represent the majority of deals under $5M), asset sales are standard. Sellers should plan accordingly.

How Asset Allocation Affects What You Owe

Even within an asset sale, the way assets are allocated between buyer and seller can meaningfully change your tax bill.

The IRS requires both parties to file Form 8594, which classifies assets into categories: inventory, fixtures, equipment, customer lists, goodwill, non-compete agreements. Each category carries different tax treatment. And this is where the tension lives.

Non-compete agreements are taxed as ordinary income for the seller and are amortizable expenses for the buyer. Buyers push hard to allocate value here. Every dollar allocated to a non-compete is a dollar taxed at your highest marginal rate.

Goodwill is taxed at capital gains rates for the seller and is amortizable over 15 years for the buyer. This is where you want the value.

Equipment and fixtures with prior depreciation create recapture income at ordinary rates. Minimizing allocated value here benefits the seller in most cases.

Do not assume the purchase price allocation the buyer proposes is tax-neutral for you. Have your CPA review it before you sign. A $250K shift in allocation from non-compete to goodwill could save you $30K to $60K in taxes depending on your bracket. Worth arguing for.

Seller Notes and Installment Sale Treatment

All of that matters, but here is a piece most sellers overlook entirely.

Seller notes are standard in SBA-financed acquisitions. You will almost certainly carry one if you sell to a buyer using SBA 7(a) financing. The typical structure we see is a 10-year full standby note at 0% interest, meaning no payments for up to 10 years. We achieve this structure on over 90% of our deals.

That sounds seller-unfriendly until you understand the installment sale rules.

Under IRS installment sale treatment, you do not recognize the full gain from the sale in the year of closing. Instead, you recognize gain proportionally as you receive payments. If your seller note pays out over 10 years, a portion of your capital gain is spread across those 10 years. For a seller with significant gains, this can be genuinely valuable:

Spreading gain recognition across multiple tax years can keep you out of higher brackets in the sale year
It delays tax payments on deferred proceeds, essentially giving you an interest-free loan from the IRS on the deferred portion
In some cases, income spreading allows you to better time conversions, deductions, or other tax events

One important caveat. If you opt out of installment sale treatment (which you can elect to do), you pay tax on the full gain in the sale year even if you have not collected the cash yet. Most sellers with meaningful seller notes should not opt out. Ask your CPA before making this election.

Side note on imputed interest: while the 0% interest rate is standard in SBA deals, the IRS applies something called Applicable Federal Rate (AFR) imputation if the interest rate is below the AFR threshold. Your accountant will handle this, but be aware it can create phantom interest income. For fully deferred standby notes, the practical impact is usually minimal. But it is one of those things that catches sellers off guard if nobody mentions it beforehand.

The Qualified Small Business Stock Exclusion (If You Have a C Corp)

If your business is structured as a C corporation and you have held the stock for more than five years, you may qualify for the Section 1202 exclusion under the Qualified Small Business Stock (QSBS) rules.

Depending on when the stock was issued and your situation, Section 1202 allows sellers to exclude 50% to 100% of the capital gain from federal tax. The exclusion is capped at the greater of $10M or 10 times the adjusted basis in the stock.

This is one of the most powerful tax reduction tools available to business sellers. But it is almost entirely pre-sale in its setup. You cannot acquire this benefit at the closing table.

If your business is a C corp, have your CPA check QSBS eligibility before you even think about valuation. Most service businesses do not qualify (professional services are excluded under the statute), but manufacturing, technology, and certain other sectors do. Worth the 30-minute conversation with your accountant. If it applies, it can dwarf every other strategy on this list.

How Business Structure Affects Sale Taxes

S corps, LLCs, and C corps all carry different tax treatment at sale. And choosing the right entity structure is something that ideally happens years before the sale, not months before.

C corp: Double taxation risk on asset sales. The entity pays corporate tax on the gain, then shareholders pay tax on the dividend. Stock sales avoid this, but buyers prefer asset sales for SBA deals. If you are a C corp seller with a buyer requiring an asset sale structure, consider requesting a Section 338(h)(10) election, which treats an asset sale as a stock sale for tax purposes under certain conditions. This requires the buyer’s cooperation and specific corporate structures, but it is worth exploring with your CPA and attorney.

S corp: Pass-through entity. Gains flow to your personal return. Asset sales are common and generally taxed at blended ordinary/capital gains rates depending on asset allocation. Section 338(h)(10) is also available for S corps under certain qualified stock purchase conditions.

LLC (taxed as partnership): Similar to S corp in many respects. Pass-through treatment. Gains flow to members. Built-in gain rules can apply in certain conversions. If you converted from C corp to S corp or LLC within the past five years, talk to your CPA about built-in gains tax before closing. This is the kind of thing that creates an ugly surprise at exactly the wrong moment.

The entity structure at the time of sale will significantly affect how to reduce taxes when selling a business. If a restructuring is worth doing, it generally needs to happen at least one to two years before the sale to be recognized and avoid scrutiny from the IRS.

Charitable Planning and Other Pre-Sale Strategies

For sellers with significant gains and philanthropic intent, charitable giving strategies can reduce taxable income in the sale year. These are not niche tools. They are standard planning for transactions above a certain size.

Donor-Advised Fund (DAF): Contribute appreciated assets or cash before the close. Take an immediate charitable deduction. Recommend grants to charities over time. For a seller in the 37% bracket donating $100K to a DAF, the net after-tax cost of that donation is roughly $63K while still directing $100K to causes you care about.

Charitable Remainder Trust (CRT): Donate a portion of the business interest to a CRT before the sale. The trust sells the asset tax-free, invests the proceeds, and pays you an income stream for life or a term. You get a partial charitable deduction, avoid capital gains on the donated portion, and receive ongoing income. Complex to set up, but for larger transactions it can make a material difference.

Qualified Opportunity Zone (QOZ) investment: Roll capital gains from the sale into a Qualified Opportunity Zone fund. Defer and potentially reduce gains while investing in designated development zones. The tax benefits have changed since 2019, but deferral of the original gain is still available for investments made through 2026.

Every one of these strategies requires pre-sale setup. A CRT in particular must be funded before the sale closes. Post-close charitable contributions are still deductible, but they do not eliminate the capital gains event.

Work with your CPA on which tools fit your situation. Not every strategy works for every seller. But ignoring them entirely is leaving real money on the table.

What Serious Buyers Already Know About Tax Structure

Here is the insider view: when our team at Regalis underwrites a deal, we model the tax impact of different structures before submitting an offer. Buyers who know what they are doing use asset allocation, note structure, and deal timing as tools. Sellers who understand the same frameworks come to the table better prepared to push back, negotiate allocations, and structure deals that maximize net proceeds rather than just the headline price.

The gross purchase price is a starting line. Your net after-tax proceeds are what you actually take home.

If you have been focused on getting to the highest number in the LOI without thinking through the tax math, it is worth slowing down. A deal at $1.8M that is well-structured on taxes can net more than a $2.1M deal that is not. We have watched that play out enough times to know.

There is no cost to you as a seller when working with a Regalis-backed buyer. Our team handles the deal structure and financing, which means you are dealing with a buyer who already understands how to put a deal together properly. That typically reduces surprises in due diligence and at the closing table.

Frequently Asked Questions

How much tax do you pay when selling a business?

It depends on deal structure, entity type, and income level. Capital gains on goodwill are taxed at 0% to 20% federally, depending on your income. Depreciation recapture is taxed at ordinary income rates up to 37%. Most small business asset sales end up as a blend of both, and state taxes add another layer. A seller netting $1M in gains might pay anywhere from $150K to $350K in total tax depending on structure.

What is the best business entity structure to minimize taxes when selling?

No universal answer here. S corps and LLCs generally avoid the double-taxation risk that C corp asset sales carry. But C corps with qualifying stock may benefit from the Section 1202 QSBS exclusion. The best structure depends on your specific business, how long you have held it, the type of buyer, and the deal terms. A CPA with transaction experience should review this well before you go to market.

Can you defer capital gains tax when selling a business?

Yes. The most common method is the installment sale, where you receive payments over time (including through a seller note) and recognize gain proportionally. Qualified Opportunity Zone investments can also defer gains. Charitable Remainder Trusts allow you to defer gains on donated business interests. All of these require advance planning and generally need to be structured before or at closing.

How does a seller note affect taxes when selling a business?

A seller note allows you to use installment sale treatment, spreading gain recognition across the years you receive payments rather than recognizing everything in the sale year. This can reduce your bracket exposure and delay tax payments on the deferred portion. For sellers carrying a standby note with no payments for years, the tax deferral benefit depends on when principal payments begin and your overall tax situation in those future years.

What is the first thing to do to reduce taxes when selling a business?

Engage a CPA who has handled business sale transactions before you go to market. Ideally six months to a year before listing. Pre-sale tax planning opens options that are simply unavailable once the deal is signed. Entity restructuring, gift and charitable strategies, and asset allocation negotiations all require advance setup. Waiting until the purchase agreement is drafted to think about taxes is the single most expensive mistake sellers make.

Ready to Sell to a Buyer Who Understands Deal Structure?

Regalis Capital works with serious, pre-qualified buyers who use SBA 7(a) financing to acquire businesses in the $500K to $5M range. There is no cost to you as the seller. No commissions. No fees. No obligation.

If you want to connect with a well-funded buyer who comes to the table properly advised and ready to close, start the conversation here.