Selling a Business: Expert Tax Guide & Checklist Released

Associated Press

22-06-2025

IRAEmpire.com has released a new and updated guide on selling a business for consumers.
SACRAMENTO, CA / ACCESS Newswire / June 21, 2025 / Selling a business might leave you with only 66% of the proceeds after taxes. That's a huge chunk gone to Uncle Sam.
Ryan Paulson, Chief Editor at IRAEmpire, says, 'The gap between your sale price and the money that ends up in your bank account can be eye-opening if you're selling a small business you built yourself. The sale typically triggers a long-term capital gain tax of 20% plus an extra 3.8% net investment income tax. Many business owners mistakenly think they'll pay ordinary income rates that can reach almost 50% in total. Let's look at real numbers: A business started with $100,000 and sold for $10 million would face federal capital gains tax that cuts the proceeds by about $2 million.'
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State taxes pack an even bigger punch. California residents could pay an additional 13.3% tax on their capital gain. A $10 million sale with a $9.9 million gain would leave you with just $6.6 million after federal and state taxes. Tax planning becomes crucial to protect the wealth you've built over years.
This detailed guide shows you seven clear steps to sell your business. You'll learn about tax implications and ways to legally reduce your tax burden. The goal? To help you keep more of what you've worked so hard to build.
Alternatively, explore the best business sale brokers of 2025 on IRAEmpire here.
Step 1: Prepare for the Sale with Tax in Mind
The gap between a good and great business sale comes down to preparation. Smart tax planning could determine whether you keep most of your money or watch it vanish in taxes.
Start tax planning early
Your tax planning should begin long before you put your business on the market. Research shows businesses that plan their exit 3-5 years ahead achieve 20-40% higher valuations than those who rush the process. Starting early opens up more tax-saving options that you won't find if you're in a hurry to sell.
Business owners often focus only on growing their company. They don't think about tax implications until it's too late. This leads to reduced profits after taxes. The best exits happen when tax planning starts at least two years before the sale. Many experts suggest starting five years ahead.
Early planning lets you build the right team. You'll need a financial advisor, CPA, business attorney, and estate attorney. These professionals can work together to create a financial strategy that lines up with what you want after selling.
Review your business structure
Your business structure plays a big role in how taxes will affect your sale. Each type-sole proprietorship, partnership, LLC, S Corporation, or C Corporation-comes with its own tax rules that can change your final proceeds.
Pass-through entities (LLCs, partnerships, S Corporations) send sale gains straight to your personal tax return. C Corporation owners should note that selling stock instead of assets helps avoid double taxation, which could cut your proceeds by about 50%.
The structure also decides if your sale counts as an asset or stock sale. Buyers usually want asset purchases for tax benefits. Sellers do better with stock sales because of better capital gains treatment. Knowing these details before negotiations helps you keep more money after taxes.
Organize financial records
Clean, well-laid-out financial records speed up sales and help you get the right price. Buyers will examine your financial health carefully. Messy or incomplete records raise red flags.
You need these key financial documents:
Buyers bring in accounting experts to check everything. They match your statements against bank records, invoices, receipts, and tax returns. Good documentation builds trust and gives you more power in negotiations.
Getting your financial statements professionally audited before the sale helps too. You'll spot weak points early and can fix issues that might lower your company's value or make negotiations harder.
The time you spend getting your business ready for sale-especially with tax planning and financial organization-leads to higher values and smoother deals. Taking care of these things early helps you keep more of the wealth you've built.
Step 2: Choose the Right Sale Type
Selling your business brings a crucial decision: choosing between an asset sale or a stock sale. This choice will substantially affect your tax burden and determine the money you'll keep after closing the deal.
Asset sale vs stock sale: pros and cons
An asset sale means the buyer purchases individual business assets instead of the entire entity. These assets include equipment, inventory, intellectual property, and customer lists. You keep the legal entity after the sale, though many businesses close down afterward.
Buyers love asset sales because:
The seller's point of view shows some drawbacks:
A stock sale works differently. The buyer purchases your ownership interests directly, and the entire business-assets and liabilities included-goes to the new owner.
Sellers usually benefit from stock sales because:
Buyers often shy away from stock sales because:
Consult the Best Business Brokers in the US Here.
How sale type affects taxes when selling a business
Your sale structure creates major tax differences. The IRS looks at each asset separately in an asset sale. Different assets face different tax treatment:
You and the buyer must use the 'residual method' to split the purchase price across asset classes. This split greatly affects your tax bill because:
Pass-through entities (S corporations, LLCs, partnerships) send gains straight to your personal tax return. C corporations might pay twice in asset sales-corporate-level tax on gains plus shareholder-level tax on distributions.
State taxes add another layer of complexity. Asset sales might need you to split gains among multiple states, just like operating income. Stock sales mostly get taxed in your home state.
Buyers and sellers want different tax outcomes, which makes the final structure a big negotiation point. Many buyers pay more for asset sales to make up for sellers' higher taxes. Some deals include 'tax gross-ups' where buyers increase the price to cover the extra taxes you'd pay in an asset versus stock sale.
Step 3: Plan for Federal and State Tax Implications
You need to understand your tax burden before selling your business. Poor tax planning can cut your proceeds in half. What looked like a great exit could end up disappointing.
Capital gains tax overview
Capital gains tax becomes your biggest tax concern when selling a business. The tax applies to the difference between what you sell for and your 'basis' - your original cost plus improvements. Let's say you started your business with $100,000 and sell it for $10 million. Your long-term capital gain would be $9.9 million.
The federal capital gains rate starts at 15% for business sales with assets held over a year. This rate can go up to 20% if you have higher income. The math is simple - multiply your gain by the rate that applies to you. In our example, a 20% federal capital gains tax would reduce your money by about $2 million.
State income tax differences
State taxes can make a big difference in what you keep. The impact varies based on where you live:
Where you live at the time of sale really matters. States use strict 'domicile' tests to figure out if they can tax you. Running your business in multiple states could mean splitting up the gain. You might need to pay taxes in each state where you did business.
Depreciation recapture and NIIT
The Net Investment Income Tax (NIIT) adds another 3.8% federal tax. This kicks in if your modified adjusted gross income tops $200,000 (single) or $250,000 (married filing jointly). The NIIT stacks on top of capital gains tax and can push your federal rate to 23.8%.
Depreciation recapture can also increase your tax bill. The IRS takes back previous depreciation deductions when you sell business property for more than its depreciated value. They tax this recaptured amount as ordinary income - up to 37% instead of capital gains rates. Business equipment (Section 1245 property) faces recapture on all claimed depreciation. Real estate (Section 1250 property) has a maximum recapture rate of 25%.
Step 4: Use Smart Tax Strategies to Reduce Liability
Tax-saving strategies can reduce your liability by a lot while selling a business. Smart planning helps you keep more of your hard-earned proceeds legally.
Installment sales to spread tax
You can receive payments over time instead of all at once with an installment sale. This spreads your tax liability across multiple years. The approach works if you get at least one payment after the year of sale. Your tax brackets stay lower and cash flow management improves.
You'll only report the gain from payments received that year rather than the entire amount. A $5 million business sale might be structured as $1 million yearly for five years. This could lower your overall tax rate.
Notwithstanding that, installment sales come with limits. This method won't work for inventory sales or publicly traded securities. On top of that, you must report depreciation recapture as ordinary income in the year of sale whatever your payment schedule.
QSBS exclusion for C Corps
C corporation owners can exclude up to 100% of capital gains through Section 1202. This applies to qualified small business stock (QSBS) held longer than five years.
The exclusion covers $10 million or 10 times your original investment basis, whichever is greater. To cite an instance, a $2 million investment later sold for $22 million could mean excluding the entire $20 million gain. This saves about $4.76 million in federal taxes plus state taxes.
Your C corporation must meet these requirements:
Charitable giving and 1031 exchanges
Donating business interests to charity before selling works well. Moving part of your business to a charitable remainder trust (CRT) or donor-advised fund lets you:
A 1031 exchange helps defer capital gains through reinvestment in similar business property. This mainly applies to real-life estate assets in your business. Your investment rolls into new qualified property.
Note that charitable donations need planning before any sale agreement becomes final. Both strategies need proper documentation and must follow IRS guidelines strictly.
Step 5: Finalize the Deal with Expert Help
Your business sale's success depends on proper documentation and compliance. Tax mistakes can get pricey, and even the best-planned exits can fall apart without executing the final steps correctly.
Filing IRS Form 8594 for asset sales
Asset sales require both buyer and seller to file Form 8594 (Asset Acquisition Statement) with their tax returns for the transaction year. The IRS determines seven asset classes, and this form documents how the purchase price gets split among them. This allocation affects:
Cash and general deposit accounts get allocated first, and other assets follow in a specific order. Buyers must use the residual method when their basis in the assets only depends on the amount paid.
Avoiding tax surprises at closing
Negotiations often hit snags over purchase price allocation. Sellers usually want more value assigned to goodwill because it's taxed at capital gains rates. This beats having value tied to tangible property, which faces ordinary income rates and depreciation recapture.
You should take these steps to close smoothly:
Working with M&A advisors and tax pros
Smart business owners bring in transaction specialists early - usually months before going to market. A qualified tax advisor can help you:
Many deals collapse during due diligence because tax problems pop up unexpectedly. Good advisors earn their keep by spotting potential issues before buyers find them. They keep deals moving forward and help you get the full value from your years of hard work.
Consult the Best Business Brokers in the US Here.
Selling Smart: Final Thoughts on Maximizing Your Business Exit
Your business sale marks the pinnacle of years-maybe even decades-of hard work and dedication. Without doubt, protecting your proceeds from excessive taxation stands as a crucial part of this substantial transition.
This piece highlights how proper tax planning can make the difference between keeping 50% versus 80% of your sale proceeds. Federal capital gains taxes, state income taxes, depreciation recapture, and the Net Investment Income Tax create a complex tax world that needs careful navigation.
Here are the key takeaways:
Start your tax planning at least two years before selling-five years would be ideal. Early preparation lets you implement powerful tax-saving strategies that aren't available close to the sale date.
Your business structure affects taxation deeply. The choice between an asset sale or stock sale substantially affects your after-tax proceeds. Stock sales usually offer better tax treatment for sellers.
Tax minimization strategies like installment sales, QSBS exclusions for C corporations, and strategic charitable giving can help. These approaches legally reduce your tax burden while arranging with your post-sale financial goals.
Of course, build a qualified team of advisors including tax professionals, M&A specialists, and financial planners. Their knowledge helps spot potential risks before they affect your transaction.
Your business sale represents one of your life's biggest financial events. The investment in proper planning and professional guidance multiplies by preserving the wealth you've built. The final sale price matters less than the money that reaches your bank account when the deal closes.
Consult the Best Business Brokers in the US Here.
FAQs
Q1. How is the tax calculated when selling a business? The tax is calculated based on the difference between your tax basis (original cost plus improvements) and the sale proceeds. This difference is typically subject to capital gains tax, which can range from 15% to 20% at the federal level, plus potential state taxes and a 3.8% Net Investment Income Tax for high-income sellers.
Q2. What documents are essential when selling a business? Key documents include detailed profit and loss statements for the past 3-5 years, balance sheets, cash flow statements, 5-year financial forecasts, and all relevant permits and licenses. It's also crucial to have your operating agreement or articles of incorporation ready, as these outline the business's ownership structure and governance.
Q3. How do I report the sale of my business on my tax return? You'll need to report the sale on IRS Form 4797 (Sales of Business Property). This form requires information such as the property description, purchase date, depreciation, and cost of purchase. For asset sales, both buyer and seller must also file Form 8594 (Asset Acquisition Statement) with their tax returns for the year of the transaction.
Q4. Are there strategies to reduce tax liability when selling a business? Yes, several strategies can help reduce tax liability. These include structuring the sale as an installment sale to spread the tax burden over time, leveraging the Qualified Small Business Stock (QSBS) exclusion for eligible C corporations, and considering charitable giving or 1031 exchanges for certain assets.
Q5. How far in advance should I start planning for the sale of my business? It's recommended to start planning for the sale of your business at least two years in advance, with many advisors suggesting a five-year timeline. Early planning allows you to implement more tax-saving strategies, assemble the right team of professionals, and potentially achieve a 20-40% higher valuation compared to businesses with shorter planning timelines.
About IRAEmpire.com: IRAEmpire.com is a trusted platform providing financial education, business insights, and unbiased reviews. Our mission is to empower small business owners, retirees, and investors to make informed, confident decisions.
CONTACT:
Ryan Paulson
[email protected]
SOURCE: IRAEmpire LLC
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