How Exit Planning Affects Your Tax Liability

Miranda Kishel
Jun 3
3 min read

When it comes to selling or transitioning out of your business, what you keep matters more than what you sell for. Exit planning isn’t just about valuation or deal structure—it’s also about minimizing your tax liability.

Poor planning can lead to unexpected capital gains taxes, ordinary income taxes, or double taxation. With smart strategies, however, you can legally reduce your tax burden and keep more of the proceeds.

Step-by-Step: How Exit Planning Affects Your Tax Liability

1. Determine If It’s an Asset Sale or Stock Sale

Asset sale: Buyer purchases individual business assets (common with LLCs or sole props).
- Taxed at both capital gains and ordinary income rates, depending on the asset.
Stock sale: Buyer purchases business stock or membership interest.
- Typically taxed at capital gains rates (preferred by sellers).

Your entity type and buyer preferences will heavily influence this structure. Each has distinct tax implications.

2. Understand Capital Gains Tax Rates

Long-term capital gains (on assets held >1 year) are typically taxed at 15% or 20% federally, depending on income level. Some states add additional taxes.

Consult IRS.gov – Capital Gains Tax for current brackets.

3. Review Entity Type Impact

Your business structure affects how proceeds are taxed:

C Corporations: Risk of double taxation (corporate tax + personal tax on dividends).
S Corporations and LLCs: Often pass-through entities, with gains taxed once at the individual level.

Exit planning often includes restructuring the business years in advance to reduce this burden.

4. Use Tax Deferral or Reduction Strategies

Exit planning may include tools to reduce or defer taxes:

Installment sales: Spread payments (and taxes) over several years.
Seller financing: Allows flexible payment and tax planning.
Qualified Small Business Stock (QSBS): May allow you to exclude up to 100% of capital gains on certain C Corp stock (IRC §1202).
Charitable remainder trusts (CRTs): Donate part of the business to charity to offset gains.
ESOPs: Sell to employees and defer capital gains under IRC §1042.

These strategies require advanced planning—often 1–3 years in advance.

5. Coordinate With Tax and Legal Advisors

Exit planning should include:

Tax impact modeling
Sale structure analysis
Review of estate plans and succession documents
Legal compliance with IRS rules and reporting requirements

Bring your CPA, attorney, and financial planner together to form a cohesive plan.

Real-World Example

A business owner sold their S Corp for $2.5M. Because they worked with a tax advisor ahead of time, they:

Structured the deal as a stock sale (avoiding asset recapture tax)
Used an installment sale over 5 years
Leveraged QSBS exclusion (IRC §1202) for a portion of the proceeds

Their effective tax rate dropped by 30%, saving over $300,000.

Common Mistakes to Avoid

Waiting too long to plan – Many tax-saving strategies must be implemented years before the exit.
Failing to understand your entity type’s implications – You might pay more than necessary without restructuring.
Overlooking state tax liability – Some states tax business sales aggressively.
Ignoring passive ownership options – Without proper planning, seller financing income may be taxed as ordinary income.

Summary of Best Practices

✅ Start tax planning at least 2–3 years before your exit

✅ Get a professional business valuation to support fair market value

✅ Identify whether the deal will be a stock or asset sale

✅ Explore capital gains strategies, deferrals, and tax exclusions

✅ Assemble your tax, legal, and financial team to coordinate the exit

Bottom line: Exit planning and tax planning are two sides of the same coin. If you're preparing to sell or transition your business, you need to think beyond price—and plan for what you'll actually keep.

Get expert guidance today. Visit our Exit Planning and Tax Advising pages to start building a smart, tax-efficient exit strategy.