Tax Implications of Selling Your Business

Miranda Kishel
Jul 25
2 min read

Learn how to navigate the tax implications of selling your business effectively.

Selling your business isn’t just a milestone—it’s a major taxable event. If you don't plan ahead, taxes can wipe out a significant portion of your proceeds. The structure of your sale (asset sale vs. stock sale), payment terms (lump sum vs. installment), and entity type (S Corp, LLC, sole prop, etc.) all play a role in your tax liability. Understanding the tax implications in advance allows you to keep more of what you’ve built.

Step-by-Step: Planning for Taxes When Selling

1. Determine the Type of Sale

Asset Sale: You sell individual assets (common for small businesses)
Stock/Equity Sale: You sell your ownership interest (more common for C Corps, S Corps)

💡 Each type affects how gains are taxed—ordinary income vs. capital gains.

2. Calculate Adjusted Basis and Estimated Gain

Your “basis” is what you originally paid for the business or assets, adjusted for improvements and depreciation.
Sale price – basis = taxable gain.

3. Understand Capital Gains Treatment

Long-term capital gains (assets held >1 year) are taxed at 0%, 15%, or 20%.
Depreciation recapture is taxed at ordinary income rates—often a surprise for sellers.

4. Explore Installment Sale Options

Allows payment (and taxation) to be spread over several years.
You report a portion of the gain each year, improving cash flow and tax control.

5. Structure with an Advisor Before Negotiations

Adjust the sale price allocation across assets (e.g., goodwill, equipment) to manage taxes.
Buyer and seller must agree on the allocation—reported via Form 8594.

Common Mistakes to Avoid

🚫 Failing to plan sale structure before listing. You lose leverage if you don’t plan taxes before negotiating.

🚫 Ignoring depreciation recapture. This portion is taxed as ordinary income—not capital gains.

🚫 Skipping Form 8594 agreement. Can trigger IRS audit if buyer/seller allocations don’t match.

🚫 Not considering installment sales. Upfront cash isn’t always the best move from a tax standpoint.

Best Practices Summary

Start tax planning 1–3 years before a sale.
Model your gain scenarios based on different sale types and payment terms.
Get professional help to structure the deal (CPA + valuation expert).
Use an installment sale to reduce taxes and increase after-tax income.
Document everything in writing, including allocation of purchase price.

Thinking of selling your business? Don’t leave money on the table.

Development Theory can help business owners minimize taxes, discover the tax implications of selling your business, and maximize value with expert guidance from valuation to closing. Book a discovery call to see what we can do.

Plan early. Sell smart. Keep more.