How to Minimize Taxes on Sale of Business: 4 Tips for 2025

When selling a business, one of the most important considerations is how much of the sale proceeds you’ll owe in taxes. Understanding how business sales are taxed, the types of taxes you might owe, and how to plan strategically can save you a significant amount of money. This guide explains the tax implications of selling a business and offers tips on minimizing your tax burden.

1. Types of Taxes You May Owe

A. Capital Gains Tax

One of the primary taxes you’ll pay on the sale of a business is capital gains tax. Capital gains tax applies to the profit made from selling an asset that has appreciated in value. For businesses, this tax is based on the difference between the sale price and the original purchase price (or basis) of the business.

There are two types of capital gains tax:

• Short-Term Capital Gains: These apply to assets held for less than a year and are taxed at ordinary income tax rates, which can be as high as 37% in the U.S.
• Long-Term Capital Gains: These apply to assets held for more than a year and are taxed at lower rates, typically between 0% and 20%, depending on your overall income.

B. Ordinary Income Tax

If part of the sale involves selling assets that are treated as inventory, or if you receive payments classified as compensation (such as consulting fees or a non-compete agreement), these proceeds will be taxed as ordinary income rather than capital gains. Ordinary income tax rates are generally higher than capital gains rates.

C. State and Local Taxes

In addition to federal taxes, you may owe state and local taxes on the sale of your business. State capital gains tax rates vary, with some states imposing no additional tax and others having rates as high as 13%. It’s important to understand the tax laws in your state and how they will impact the overall tax burden from the sale.

2. How the Deal Structure Affects Taxes

A. Asset Sale vs. Stock Sale

The structure of your deal—whether it’s an asset sale or a stock sale—can significantly impact your tax liabilities. In an asset sale, the buyer purchases individual assets (such as equipment, intellectual property, or inventory), and the seller may face higher taxes since the proceeds are taxed based on how different assets are classified (capital gains or ordinary income). In a stock sale, the buyer purchases ownership of the company through its stock, and the seller typically benefits from lower capital gains tax rates.

B. Installment Sales

An installment sale allows the seller to receive payments over several years instead of a lump sum upfront. This can spread out the tax liability over time, potentially lowering the tax bracket for each year. However, interest earned on installment payments is taxable as ordinary income.

C. Seller Financing

In some deals, the seller provides financing to the buyer, allowing the buyer to pay the purchase price over time. Similar to an installment sale, seller financing can reduce immediate tax obligations by spreading out payments and taxes over several years. The seller may also benefit from receiving interest payments on the loan, which will be taxed as ordinary income.

3. Strategies to Minimize Taxes

A. Taking Advantage of Capital Gains Treatment

Whenever possible, sellers should aim to structure the sale to benefit from long-term capital gains tax rates, which are significantly lower than ordinary income tax rates. Holding the business for more than a year before selling and structuring more of the sale price as the purchase of shares or ownership stakes, rather than assets, can help minimize taxes.

B. Using a Qualified Small Business Stock (QSBS) Exclusion

If your business qualifies as a small business under IRS guidelines, you may be able to exclude a portion of the capital gains from the sale using the Qualified Small Business Stock (QSBS) exclusion. This can result in significant tax savings, especially for businesses in sectors like technology or manufacturing.

C. Charitable Remainder Trusts (CRTs)

A Charitable Remainder Trust (CRT) allows you to transfer a portion of the sale proceeds into a trust, deferring taxes and receiving a charitable deduction. The trust makes annual payments to you (or another beneficiary) over a specified period, and the remainder of the assets eventually goes to a charity. This is a useful tool for sellers looking to reduce taxes while supporting a charitable cause.

4. Tax Planning and Professional Help

A. Working with a Tax Advisor

Given the complexity of tax laws related to business sales, it’s essential to work with an experienced tax advisor. A tax professional can help you understand your specific situation, evaluate potential tax liabilities, and recommend strategies to minimize your tax burden. They can also help you ensure that the deal is structured in a tax-efficient manner.

B. Timing the Sale

When you sell your business can also affect your tax liabilities. By timing the sale to fall in a year when your other income is lower, you may be able to reduce the overall tax rate applied to the sale proceeds. Additionally, certain tax provisions or laws may change from year to year, so keeping an eye on potential changes can help you make strategic decisions about when to sell.

Conclusion

Paying taxes upon the sale of a business is an unavoidable part of the process, but with careful planning and strategic decision-making, you can significantly reduce the impact on your net proceeds. Understanding the types of taxes involved, structuring the deal to your advantage, and working with a professional tax advisor will help ensure that you maximize the value of your business sale while minimizing the tax burden. The earlier you start planning, the better positioned you’ll be for a smooth and tax-efficient sale.