How to Save on Taxes When Buying or Selling a Business: The Ultimate Guide
Navigating a business transition can be both exhilarating and overwhelming. The sheer complexity means that even important details can get overlooked. There are several components to selling a business.
First, and most self-explanatory, is the business side of things. Is your business ready to sell?
Next, is the personal and emotional component. Are you ready to sell? You may be selling something you’ve worked on your whole life and you’re not sure what’s next. Have you thought through what that means?
Finally, the personal and financial side of things. Do you know if you’ll have enough money after the sale to live the life you want?
Wrapped up in all of these complex emotional and financial decisions are taxes. The tax implications of a sale can significantly affect your outcome, and they can turn what appears to be a smart financial decision into a costly one without proper planning. Ironclad Wealth Management can help you preserve more of what you’ve earned as you chart your path towards an eventual exit.
Why Tax Planning Matters in Business Transition
Without business transition tax planning, entrepreneurs and small business owners risk giving away a significant amount of their sales proceeds to the IRS. This is probably your last bite of a large meal that’s fed you and your family for years. If you’re like most people, you want to make the most of it.
So, what does this look like from a practical perspective?
When selling your business, you need to sell for enough that your investments can then provide your desired lifestyle for you and your family. The problem is that you may be going from a business that has a 25% profit margin to an investment portfolio that supports a 4% withdrawal rate. That’s a pretty big difference!
The amount that you need to sell your business for to provide your lifestyle is what I call the “Wealth Gap.” The Wealth Gap is the difference between what you need to provide for your lifestyle and what you have in personal, outside investments today. That Gap is the amount that you need to sell your business for after taxes.
Wealth Gap = Amount Needed to Generate Desired Income – Personal Investment Assets
With a desired income of $250,000 and a 4% withdrawal rate, it would take $6,250,000 to retire today. If you had $2,000,000 of personal assets, that would mean you need to make $4,250,000 from the sale of your business. That’s your Wealth Gap.
However, that’s excluding taxes. Including taxes at a 25% tax rate, you need $5,666,666.67 to reach your Wealth Gap of $4,250,000. That means that without tax planning, your Wealth Gap is much higher!
That’s the point of tax planning during a business transition. Lowering your tax bill means that you can either meet your goals with a lower sales price or receive a higher income if you plan properly.
The first step in preparing financially to sell your business should be to identify your personal Wealth Gap. If you haven’t, take the time to do so before starting any tax planning.
Want to calculate your own Wealth Gap?
Key Tax-Saving Opportunities for Sellers
One of the main financial goals of any business owner looking to sell is to save capital gains taxes. The good news is that there are several tax saving strategies available to small business owners who are looking to sell their business.
The magic happens when you find the right strategy for your personal situation. Jamming the wrong strategy into your life purely to save taxes can cause more problems than the tax savings are worth.
Even worse, you may hear about a strategy that’s too good to be true…and is. Don’t get swept up in the emotions of a sale and make a decision that that could trigger IRS scrutiny and distract you from the peace of mind you hoped to enjoy post-sale.
So which tax savings strategies are out there? Here’s a brief list with commentary on what they do and who they may work for.
Installment sales
The easiest way to reduce your taxes is to spread your gain over multiple years in an installment sale. In an installment sale, you receive your proceeds over a set period instead of all at once. The main benefit is that you may be in a lower tax bracket during the installment period. The highest tax bracket for capital gains is 20% and the lowest is actually 0%. However, if you’ll be in the highest bracket no matter how you spread this out, there’s really no benefit. Remember, you are also loaning the buyer the money, so you must be comfortable with their ability to pay.
Best for: Business owners who are comfortable taking the loan risk and will be in a lower tax bracket post sale.
Qualified Small Business Stock Exclusion (QSBS)
The QSBS exclusion is the most beneficial part of the tax code for business sellers but does not apply to all businesses.
The QSBS exclusion excludes up to $15m or 10x your investment, whichever is higher, from capital gains taxes. To qualify, you must be a C-Corp, have received stock directly from the corporation, the corporation must have had less than $75m in assets at the time of issuance, and 80% of assets must be used in a qualified trade. You receive a 50% exclusion after 3 years, 75% after 4 years, and 100% after 5 years of holding. These rules were recently changed in The One Big Beautiful Bill Act (OBBBA) and your exact terms will vary based on when your shares were issued.
Best for: C-Corporations who qualify. There is no better tax saving strategy than the QSBS exclusion. If you didn’t start as a C-Corp, you may still be able to convert and partially qualify if you have a 3+ year window.
Structured Installment Sale
A structured installment sale has the same tax treatment as an installment sale with one major change – there is no loan risk. This is because the buyer deposits the full purchase price with an intermediary. This intermediary then pays you according to your schedule. This is an irrevocable election as part of the sales agreement.
Best for: Business owners who think an installment sale may work for the reasons above but are expecting a lump sum sale.
Charitable Remainder Trust
This trust allows you to gift your shares of the company to a trust and receive a charitable deduction. When the trust sells the business, it pays no income taxes. While you live you receive a set payment each year and then whatever is left passes to your named charity at death. As the income comes to you, you do pay personal taxes on it in the same manner your trust earned the income. However, you get to earn 5% on $10,000,000, not $7,500,000! This must be done in advance of a sale and S-Corp stock does not work with Charitable Remainder Trusts.
Best for: This option could be good for a business owner with charitable intent who has a good understanding of their possible sale timeline. Also, if you are concerned with your heirs losing their inheritance, it is common to pair this with a life insurance policy to provide for them.
Opportunity Zone Investing
Investing in an Opportunity Zone allows an investor to defer eligible gains for a period of time. After a sale, you must invest within 180 days in an eligible Qualified Opportunity Zone. Currently, you can defer your gains until Dec. 31, 2026. Beginning Jan. 1, 2027, you can defer your gain for 5 years. The main benefit of OZ Funds is that you can then exclude the appreciation of the OZ investment itself if you hold the fund for 10 years. OZ Funds are in a state of flux right now with this waiting period from the OBBBA. However, they can provide substantial tax benefits for the right person and it is one of two strategies on this list that can be done after a sale! OZ Funds are complicated and if you are interested, here is a good overview of the current state of affairs.
Best for: A business owner who has already sold and is comfortable investing their money in a new investment for 10+ years.
Tax Loss Harvesting
Finally, there is tax loss harvesting. In tax loss harvesting you take your proceeds and invest in a taxable investment account that generates losses while still generating market returns. The main benefit is that this can be done post-transaction. The losses generated offset your capital gains. This is probably the most flexible option.
Best for: The business owner who has already sold or doesn’t want to have any complicated lockups with their money. Check out our detailed guide here.
Key Tax Strategies for Buyers
While this blog is mainly geared towards sellers, I do want to address buyers briefly. While there are fewer strategies available to buyers than sellers, you can structure a deal to help you save money on taxes.
Most buyer tax benefits are directly derived from the structure of the deal. If the purchase is an asset purchase, it becomes very straightforward. You can depreciate the fixed assets that you purchase, and they are usually eligible for bonus depreciation. You can also amortize intangible assets like goodwill over a 15-year period. When you buy the business, it’s highly likely that you will pay less in taxes than the previous owner for the first several years, which can help with early cash flow.
If you buy a business in a stock sale, you would think that you may be ineligible for asset level depreciation; however, with proper business tax strategy and planning you can still achieve this in some cases. If your transaction is eligible, you may be able to utilize a Section 338(h)(10) election. This allows buyers to treat the transaction as an asset purchase for tax purposes while still executing it as a stock purchase.
This gives a buyer both the ease of a stock sale and the tax benefits of an asset sale. However, the seller will most likely incur some additional taxes and may need to be compensated for that.
What to Avoid: Common Tax Mistakes in Business Sales
Unfortunately, more exits than not go poorly or leave business owners with a sense of regret. Most of these regrets tend to happen on the personal, emotional side where a small business owner feels like they’re losing a piece of their identity after the sale. However, improper tax planning can also cause issues.
I see three major issues when it comes to tax planning during exit planning:
- Reactive, not proactive planning – As you saw above, some strategies need planning before a sale is executed. By waiting too long, you may limit the possibilities available to you and cause issues for yourself down the road.
- TOO much focus on taxes – Sometimes business owners can become TOO focused on the tax aspects of a transaction and ignore other factors that may hamper them in the future. It may sound funny coming from a financial planner, but remember, taxes aren’t everything!
- Falling for “Too Good to be True Strategies” – When you're looking at a big tax bill, schemes that promise to eliminate all your taxes start looking pretty tempting. Some business owners take tax positions that I would charitably call misguided, and uncharitably call fraudulent, in the pursuit of tax savings. Don’t do it. When in doubt, check the IRS Dirty Dozen list for common scams.
Avoiding these pitfalls is just as important as identifying the right strategies for good tax planning.
The Role of Exit Planning with Ironclad Wealth Management
A trusted advisor like Ironclad Wealth Management is an integral part of any exit planning process. The tax piece is critical, but it's just one part of a much bigger puzzle.
We help business owners:
- Calculate their personal Wealth Gap
- Determine if they're financially ready to sell
- Prepare their family for life after the business
- Coordinate with their team of attorneys, CPAs, and investment bankers
- Make sure their business goals and personal goals actually align
The goal isn't just to save on taxes, it's to make sure the entire transition sets you up for the life you want afterward.
The Bottom Line
Buying or selling a business is one of the biggest financial decisions you'll make. The tax implications can dramatically affect your outcome, but they don't have to derail your plans.
The key is planning ahead, understanding your options, and working with advisors who see the big picture, not just the tax bill.
Whether you're preparing to sell the business you've built or looking to acquire your next opportunity, proper tax planning can save you significant money and set you up for long-term success.
Ready to explore your options? Ironclad Wealth Management helps small business owners navigate complex business transitions while minimizing taxes and maximizing outcomes. Schedule a consultation today to discuss your specific situation.
Want to Keep Reading more about saving capital gains on your business sale? Check out our blogs on Asset vs. Stock Deals, Installment Sales, Structured Installment Sales, Qualified Opportunity Zone Funds, Tax Loss Harvesting, Charitable Remainder Trusts, Employee Stock Ownership Plans (ESOPs), and Qualified Small Business Stock Exclusions (QSBS).
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Nothing provided in this presentation constitutes tax advice. Individuals should seek the advice of their own tax advisor for specific information regarding tax consequences of investments. Investments in securities entail risk and are not suitable for all investors. This site is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.
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