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How to Sell Your Business and Strive to Pay As Little in Taxes As Possible

By Michael Nedreski

Selling your business can bring rewards, but it may also mean facing a hefty tax bill if not handled wisely. As a business owner, your goal is to optimize your sale's value while reducing any tax obligations. This approach grants more financial freedom for your post-business retirement plans. 

Luckily, there are many strategies to help you pursue this goal. In this article, we explore ways to sell your business while potentially reducing tax liabilities and boosting profits. Understanding capital gains tax intricacies, asset valuation, effective negotiation techniques, and other strategies can help pave the path to a successful tax-efficient business sale and a seamless financial transition.

Plan for and Reduce Capital Gains 

One of the primary considerations when selling a business is the impact of capital gains tax. Capital gains tax is a tax on the profits earned from the sale of an asset, such as a business or investments. The amount of tax owed is determined by several factors, especially the duration of ownership. When you sell after owning an investment (or business) for more than a year, you will qualify for the lower, long-term capital gains tax rate, as opposed to the typically higher ordinary income tax rate. Generally, short-term capital gains are taxed at the marginal tax bracket, while long-term capital gains are taxed at a lower rate of 0%, 15%, or 20% depending on income level. This sale must be taken into consideration with other types of income you may have throughout the year, so you can plan ahead for your tax bill and work to pay the least amount possible.  

Valuing Assets

Another key area to determining your tax liability is the assets your business owns. Items like real estate, equipment or machinery, raw materials and supplies, and intellectual property all need to be taken into consideration before you finalize any sale. Each party has a different interest in valuing these assets, so it's important to understand that in negotiations. During the process, the buyer and seller naturally want a favorable basis, respectively. The buyer wants a higher allocation of the valuation listed to assets to increase a higher basis and have the ability to depreciate those assets quickly, while the seller wants a lower allocation toward assets in order to reduce capital gains and their overall tax burden. It is also important to understand the order for allocating the valuation of assets, which prioritizes easier-to-value assets (such as cash and deposits held in checking or savings accounts) while pushing down harder-to-value items (like goodwill). 

Additional Strategies

In addition to the points mentioned above, there are other strategies that may be a fit depending on your situation and your business. While these aren't one-size-fits-all solutions, they are ideas you can discuss with your financial advisor and professional team.

Section 1202

Section 1202 of the tax code provides an opportunity for small business owners to reduce their capital gains tax liability when selling their business. This section allows for tax exemptions on certain types of small business stock, which can result in significant tax savings. To take advantage of Section 1202, business owners must meet specific criteria, such as having held the stock for at least five years and meeting certain size requirements. 

Negotiate an Installment Sale

Another strategy is to structure the deal as an installment sale, agreeing to receive payments for the business over time rather than in a lump sum. This can help spread out your tax liability over a longer period of time, reducing the amount of capital gains tax you owe in any given year. 

Deduct Business Expenses

It is also important to deduct all eligible business expenses prior to the sale of your business. This helps reduce the amount of your total taxable capital gains and thus lowers your overall tax bill. If you're uncertain what to deduct, work with a tax professional to take advantage of all relevant expenses and confirm compliance with all applicable tax laws and regulations.

Collaborate with a Financial Advisor for Custom Strategies

As you can see, there are various strategies to help reduce your tax burden when selling your business, but it's wise to consult with a financial professional before taking action. Your business and post-sale plans are unique and require personalized advice. 

Contact our team at White Oak Wealth Partners for customized guidance tailored for a tax-efficient business sale. To get started, contact us by calling 814-835-4551, emailing MICHAEL.NEDRESKI@LPL.COM, or scheduling an appointment here.

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking tax or investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

About Michael

Michael Nedreski is managing partner at White Oak Wealth Partners, a specialized financial lifestyle and wealth management firm serving entrepreneurs, business owners, executives, and their families. Mike has 30-plus years of experience in the financial services industry and is committed to serving his clients through holistic financial planning, disciplined investment strategies, and proactive personal service. 

A native of Erie, Pennsylvania, Mike began his career in the financial services industry in 1988. He has earned the Chartered Retirement Planning CounselorSM (CRPC®) designation conferred by College for Financial Planning (188-LPL). Mike is also an active member of the Financial Services Institute (FSI) and Financial Planning Association (FPA).

When not working, Mike enjoys spending time with his wife, Amy, and their children. He volunteers in his community and at his church and his children's schools. An outdoors enthusiast, Mike loves hunting, fishing, golfing, and spending time near or on the water. He also enjoys working out and watching some of his favorite sports teams, the Pittsburgh Pirates and the Cleveland Browns. To learn more about Michael, connect with him on LinkedIn.