Tax Planning for a Business Sale

A note before you read: Bellarmine Partners is an M&A advisory firm. We are not a tax or law firm, and nothing here is tax or legal advice. Tax law changes often, and the right answer depends on your entity, your state, your history, and the specific deal. Use this article to prepare for conversations with your CPA and tax attorney, and make decisions with them. Our Tax Coordination in a Sale service exists to keep those advisors and the deal working from the same plan.

Plan around what you will keep

The price in a letter of intent is the starting point. What reaches your account is that price after several deductions, and the tax bill is often the largest one. Before you negotiate, ask your CPA to build a simple net proceeds model showing:

• Purchase price
• Less debt paid off at closing
• Less transaction costs: advisory fees, legal fees, accounting fees
• Plus or minus the working capital adjustment at closing
• Less amounts held back in escrow or paid later (seller notes, earnouts)
• Less federal income tax, state and local income tax, and any additional taxes that apply to your situation
• Equity you roll into the buyer’s company, shown separately because it has value but is not cash

Run the model under at least two structures, for example an asset sale and a stock sale. Seeing the difference in your own numbers is the best preparation for negotiating structure.

Asset sale or stock sale

In a stock sale (or a sale of LLC units), the buyer purchases your ownership interest and takes the company as it is, including its history. In an asset sale, the buyer purchases the company’s assets, and the selling entity keeps most of its liabilities.

Buyers usually prefer asset deals. They get to depreciate and amortize the purchase price (a “stepped-up basis”), which lowers their own taxes for years, and they inherit fewer liabilities. Sellers often prefer stock deals, which tend to be taxed more favorably for them and are simpler to close. How this plays out depends heavily on your entity type:

• C corporation: an asset sale is generally taxed twice, once at the corporate level and again when the proceeds are distributed to you. A stock sale is generally taxed once. This is the entity type where the asset versus stock question matters most.
• S corporation: gain generally passes through and is taxed once. In an asset sale, though, part of the gain can be taxed at ordinary income rates, such as recapture of past depreciation on equipment and vehicles. If the company converted from a C corporation, ask about built-in gains tax.
• LLC taxed as a partnership: a buyer of all the units can generally get a stepped-up basis. Part of your gain may still be taxed as ordinary income, depending on the company’s receivables, inventory, and depreciated assets.
• Sole proprietorship or single-member LLC: the sale is generally treated as a sale of assets.

There are structures that let a buyer get the tax benefits of an asset purchase while the seller sells equity, such as certain elections and pre-closing reorganizations that are common with S corporations. They cost the seller something in tax, so they are usually paired with a price adjustment (a “gross-up”). If a buyer proposes one, have your CPA quantify the difference before you agree.

Questions for your CPA:

• What is my tax basis in my stock or units, and in the company’s assets?
• What would I net in an asset sale compared with a stock sale at the same price?
• Is there a structure that gives the buyer a step-up, and what would I need to be paid to make it even?

How the price is allocated

In an asset sale, and in stock deals treated as asset sales for tax purposes, the price is divided among categories of assets. Each category can be taxed differently, and buyer and seller usually want different allocations.

Typical categories and how they tend to be treated for the seller:

• Receivables and inventory: often ordinary income
• Equipment, vehicles, and other depreciated property: ordinary income to the extent of prior depreciation, with any remaining gain often capital
• Real estate: its own rules, including recapture for some prior depreciation
• Goodwill and other intangibles: generally capital gain for the seller, amortized over a long period by the buyer
• Non-compete agreements: generally ordinary income to the seller
• Consulting or employment agreements after closing: ordinary income, and usually subject to payroll taxes

Sellers usually want more of the price allocated to goodwill. Buyers often want more allocated to assets they can write off quickly. Both sides report the allocation to the IRS and are expected to be consistent, so negotiate the allocation, or at least the method, in the purchase agreement. Leaving it for after closing gives up bargaining power you had during the negotiation.

Two items to raise with your advisors:

• Personal goodwill. In some C corporation sales, part of the value belongs to the owner personally (for example, relationships or reputation that were never transferred to the company) and can be sold directly by the owner. This needs real facts behind it, careful documentation, and an appraisal. It is closely scrutinized.
• Real estate. If you own the building, decide early whether to sell it with the business, sell it separately, or keep it and lease it to the buyer. Each option has different tax and income consequences.

Getting paid over time: seller notes, earnouts, and escrows

Part of the price is often paid after closing. That affects both your risk and your taxes.

• Installment sales and seller notes. When you receive payments over several years, you may be able to spread the tax over those years. Some items, including depreciation recapture, may be taxed in the year of sale even if you haven’t received the cash. Large installment obligations can carry additional interest charges. The bigger issue is credit risk: a seller note is usually behind the bank, so if the business struggles, you are paid last.
• Earnouts. Payments tied to future performance can often be treated as part of the purchase price. If the earnout depends on you staying employed, it may be taxed as compensation at ordinary rates. Wording matters. Tie earnouts to measures you can see and influence, and define how they will be calculated.
• Escrows and holdbacks. Money held back for indemnification claims or working capital adjustments has its own timing for when it is taxed. Ask your CPA how your escrow will be treated.

Rollover equity

Private equity buyers often ask the seller to reinvest part of the proceeds into the buyer’s company, so you keep a stake and share in a future sale. Done correctly, the rolled portion can often be structured so it is not taxed at closing. Done incorrectly, you can owe tax on equity you received with no cash to pay it.

Before agreeing to a rollover:

• Have your CPA and attorney confirm the rollover is structured to be tax-deferred. With S corporations this often requires a reorganization before closing, which takes time to set up.
• Understand what you are receiving: which class of equity, whether other investors are paid ahead of you, and what rights you have
• Read the provisions on how and when you can sell, and what happens if you leave the company or are terminated
• Remember that the rolled amount is at risk. Plan your personal finances around the cash you receive at closing.

State and local taxes

State taxes can be a large part of the total bill, and the rules vary widely.

• Where you live. Your state of residence generally taxes your gain, particularly on a stock sale.
• Where the business operates. In an asset sale, states where the business operates may tax part of the gain even if you live elsewhere. Businesses operating in several states may have the gain apportioned among them.
• Moving before a sale. Some owners consider moving to a state with lower or no income tax. States audit these moves closely. A real change of residence needs to happen well before the sale and be supported by how you actually live: home, time spent, licenses, voter registration, and where your family and activities are. A move made shortly before closing is likely to be challenged.
• Trust strategies. Some owners use trusts established in other states. These are complex, and several states have changed their rules to limit them. Get specific advice.
• Pass-through entity tax elections. Many states let S corporations and partnerships elect to pay state income tax at the entity level, which can make the state tax deductible federally. Ask your CPA whether an election makes sense in the year of the sale.
• Other state items. Real estate transfer taxes, sales tax on certain transferred assets, and state “bulk sale” or tax clearance rules can affect closing. Some states require a clearance certificate to protect the buyer, which takes time to obtain.

QSBS: worth checking if you own C corporation stock

Qualified small business stock (QSBS, under Section 1202 of the tax code) can exclude part or all of the federal gain on the sale of stock. It applies in a narrow set of cases, and owners who qualify often don’t know it. The main requirements:

• The company is a C corporation, and you acquired the stock directly from the company, not from another shareholder
• The company’s assets were below a statutory limit when the stock was issued
• The company is an active operating business in a qualifying field. Many service fields are excluded, including health, law, accounting, consulting, financial services, and the operation of restaurants and hotels. Manufacturing, distribution, and many technology and consumer product businesses can qualify.
• You held the stock for the required period. The full exclusion has traditionally required more than five years. Legislation in 2025 added partial exclusions for shorter holding periods and raised some limits for stock issued after the law took effect. Confirm the current rules with your CPA.

Practical points:

• S corporation and LLC interests don’t qualify. Converting to a C corporation can start a new qualification clock, but it has other tax costs, so it only makes sense with a long enough runway and careful analysis.
• The benefit generally applies to a sale of stock. An asset sale by the corporation usually loses it, which matters when a buyer pushes for an asset deal.
• Not every state follows the federal treatment. California, for example, does not.

For most dental and medical practices, restaurants, and professional service firms, QSBS won’t apply. For a manufacturer or distributor organized as a C corporation, it is worth an early conversation.

Selling to an ESOP

Sales to an Employee Stock Ownership Plan have their own tax rules. In some cases, a C corporation owner selling to an ESOP can defer the gain by reinvesting the proceeds in qualifying securities, provided the ESOP owns a minimum share of the company after the sale and other requirements are met. An S corporation owned by an ESOP may have favorable treatment at the company level. ESOPs require specialized trustees, appraisers, and counsel, and the tax benefits are part of the reason some owners choose them over a third-party sale.

Timing the close

When the deal closes can change the tax result:

• Which tax year. Closing in late December or early January moves the gain into a different year, which can matter if your other income, the tax rates, or the law will be different
• Pending tax law changes. If rates or rules are expected to change, closing before or after the effective date can matter
• Offsetting income. Losses, large charitable gifts, or other deductions may be worth timing into the year of sale
• Participation in the business. Whether certain additional taxes apply to your gain can depend on how actively you were involved in the business. Ask your CPA how your role is treated.
• Estimated taxes. After closing, you will likely owe estimated tax payments. Plan the cash so you aren’t surprised by penalties.

Gifting and estate planning before a sale

For owners who want to pass wealth to children or other family members, the period before a sale is often the best time to do it. Before a deal is agreed, interests in a private company can often be valued at a discount for lack of control and lack of marketability. Once a deal is signed, the value is fixed at the deal price, and the IRS may treat gain on interests you transferred late in the process as yours anyway.

Common tools to discuss with an estate attorney:

• Gifts of minority interests to children or to trusts for their benefit
• Trusts designed so the gifted interest grows outside your estate, sometimes while you continue to pay the income tax on it
• Trusts that return value to you over a fixed term and pass any growth above a set rate to beneficiaries
• Charitable remainder trusts, which can provide you income, defer tax on the sale, and leave the remainder to charity
• Gifts of company stock to a donor-advised fund or charity before the sale, which can produce a deduction and avoid tax on that portion of the gain

These require a qualified appraisal, legal documents, and in some cases changes to your operating or shareholder agreement. They take months to set up and generally need to be in place before a letter of intent is signed. Estate and gift tax exemption amounts are set by law and change over time, so confirm current figures with your attorney.

Questions to bring to your CPA and attorney

• What is my entity type, and what is my basis in the company and its assets?
• What would I net in an asset sale compared with a stock sale at a realistic price?
• Which assets would produce ordinary income in an asset sale, and how much?
• Should we discuss a pre-sale reorganization, and how long would it take?
• How should we approach the price allocation?
• If a buyer proposes rollover equity, how do we keep it tax-deferred?
• What state taxes apply, and does a pass-through entity tax election make sense?
• Do I hold C corporation stock that could qualify for QSBS?
• What should I give to family or charity before the sale, and by when?
• Which year should we target for closing, and why?

Build the team early

The owners who keep the most from a sale usually put their advisors together well before going to market: an M&A advisor, a CPA with transaction experience, an M&A attorney, an estate attorney, and a wealth advisor. They also make sure those people talk to each other before a letter of intent is signed, when there is still time to change structure. Most of the important tax decisions are much harder to change once a deal is agreed.

This article is provided for general informational purposes only and does not constitute legal, tax, financial, or investment advice. Bellarmine Partners does not provide tax or legal services. Every business and situation is different; please consult a qualified CPA and tax attorney before making decisions.