Selling your business? Most of the tax outcome is decided before the letter of intent.

For most business owners, the sale of the company is the largest financial event of their lives, and most of the tax outcome is decided before the letter of intent is signed. Structure, timing, entity type, and how proceeds are paid can move the after-tax result by a wide margin. Here is what we would want on the table twelve to twenty-four months before a sale.

Asset sale or stock sale

Buyers often prefer to buy assets because they get a stepped-up basis and leave liabilities behind. Sellers often prefer to sell stock because the gain is generally capital gain. In an asset sale, part of the price can be taxed as ordinary income, for example amounts allocated to depreciated equipment or certain contracts, and owners of a C corporation can face two layers of tax. How the purchase price is allocated is negotiable and worth modeling before you agree to a number.

Qualified small business stock

Owners of certain C corporations may be able to exclude a large part of their gain under Section 1202. For stock acquired after July 4, 2025, the exclusion is 50% after three years, 75% after four years, and 100% after five years, with a per-issuer cap of the greater of $15 million or ten times basis, and a $75 million gross asset limit at issuance. Stock acquired earlier keeps the prior rules: a five-year holding period and a $10 million cap. Eligibility depends on the type of business and other requirements, so confirm it with counsel well before a sale.

Moves that need lead time

• Charitable giving. Contributing shares to a donor-advised fund or charitable remainder trust before a binding sale agreement can avoid the gain on those shares. After the deal is effectively done, the IRS can treat the gain as yours.
• Gifts to family and trusts. Transferring interests while the company is valued before a sale can move future appreciation out of your estate, using your lifetime exemption.
• State residency. A genuine move to a lower-tax state can matter, but states scrutinize moves close to a sale.
• Installment sales and earnouts. Spreading payments over years can spread the tax, at the cost of credit risk on the buyer.
• Retirement plans. A final year of large contributions to a cash balance or 401(k) plan can shelter income before the business is gone.

After the wire hits

The sale ends one problem and creates another: a large pile of cash and a new identity as an investor rather than an operator. A plan for that money, including how much is needed to replace your income, how it will be invested, and how quickly, matters as much as the deal itself.

Your pre-sale team

A sale goes best with an M&A attorney, a CPA, an estate attorney and a wealth advisor talking to each other early. If you are thinking about selling in the next two years, that conversation should start now.