How to Reduce Taxes When You Sell Your Business

Taxes Usually Cost More Than the Broker

Owners spend a lot of energy trying to shave a point off a broker's fee. That effort is often aimed at the smaller number. On most sales, the tax bill is far larger than the commission.

At Fort Worth Business Brokers HQ, we connect owners with an experienced broker who works alongside your CPA to plan the sale with taxes in mind.

The good news is that much of that bill can be shaped. Structure, timing and paperwork all change what you owe, and none of them cost much if you start early enough.

This is a general overview, not tax advice. Tax law changes and every company is different, so run your own plan past a CPA who has worked on business sales.

Start With the Gain, Not the Price

You are taxed on your gain, which is the sale price minus your basis. Basis is roughly what you have invested and not yet written off. Two owners who sell for the same price can owe very different amounts.

That is why the first job is to know your basis in the company, its equipment and any property it holds. Your CPA can pull this together from old returns and depreciation schedules.

Texas helps here. The state has no personal income tax, so the planning for most Fort Worth owners centers on federal tax. That federal bill is still large enough to deserve real attention.

Asset Sale or Stock Sale

Most smaller deals are asset sales. The buyer purchases the equipment, customer list, name and goodwill, and your company keeps its own shell. Larger deals use stock sales more often, where the buyer takes over the company itself.

Sellers usually come out ahead with a stock sale, since the gain is generally treated as a capital gain. Buyers tend to prefer asset sales because they get fresh write offs and leave old liabilities behind.

Which way a deal goes is part of the negotiation. A seller who understands the tax gap between the two can trade on it, for example by accepting an asset sale in exchange for a better price.

If your company is a C corporation, the stakes are higher. An asset sale can mean tax at the company level and again when the money comes out to you. Ask your CPA about this well before you go to market.

How the Price Gets Split

In an asset sale, the price is divided among the things being sold. Buyer and seller agree on that split and both report it to the IRS. It is one of the most important tax decisions in the whole deal.

Different pieces are taxed differently. Goodwill is generally taxed at capital gains rates. Equipment you have already depreciated can trigger recapture, which is taxed like ordinary income.

Money paid for a non-compete or for consulting after closing is also ordinary income to you. Buyers often like to push more of the price into those buckets, so read the allocation closely before you sign.

Trucking, construction and oilfield service companies with large equipment lists feel this the most. If that sounds like your company, see our page on selling an oilfield services company for more on equipment heavy deals.

Spreading Payments With a Seller Note

Many deals include a seller note, where you carry part of the price and the buyer pays you over time. Under the IRS installment method, you can often report that part of the gain as the payments come in.

That can keep more of your gain out of a single tax year. It does come with risk, since you are counting on the buyer to keep paying, and recapture on equipment is generally taxed in the year of sale anyway.

Your Entity Choice, Years Ahead

The way your company is organized shapes your options at sale time. An LLC, an S corporation and a C corporation are each taxed differently when they are sold.

One federal rule, known as Section 1202, can exclude much or all of the gain on qualifying C corporation stock held for several years. It has strict requirements and does not apply to LLC or S corporation sales.

Changing structure is not something to do the year you sell. If a sale is three or more years away, ask your CPA whether your current setup still fits the exit you have in mind.

Hiding Income Is the Most Expensive Tax Move

Some owners keep taxable income low by running personal costs through the company or leaving cash off the books. Legitimate personal expenses can be added back when your earnings are recast. Unreported cash cannot.

A buyer pays only for income you can prove. If businesses like yours sell for two to three times cash flow, every dollar you hid to save tax can cost you two or three dollars of sale price.

Cleaning this up a couple of years before a sale lowers the tax savings you were getting, but it raises your provable earnings and your value by much more. Our business valuation page explains how recasting works.

If the Company Owns Real Estate

Property is taxed on its own terms. You may sell it with the business, sell it separately or keep it and lease it to the buyer. Each path leads to a different tax result.

Tools like a 1031 exchange can defer tax when you sell real property and buy more. They can be useful, but pick the exit you want first and then use the tools to support it, not the other way around.

Build the Right Team Early

The CPA who files your yearly return may not be the right person to plan a sale. Look for one who has worked on business sales, and pair them with an attorney who handles deals.

Bring them in before a letter of intent is signed. By then the price, the structure and the allocation are already taking shape, and changing them gets harder. Our exit planning page covers the rest of the prep.

Paying your taxes is a separate step from reducing them. Texas buyers will also ask for proof that your state taxes are settled, which our guide to the Certificate of No Tax Due explains.

Getting Started

The best tax plan starts with a real number. Request a free, confidential valuation to see what your company could sell for, then take that figure to your CPA.

Prefer to talk first? Call (817) 555-0142 and we will connect you with an experienced broker who can walk you through the next steps.