Selling Your Business: Tax-Efficient Exit Strategies

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Asset sale: buyer purchases individual assets; seller may owe ordinary income tax on some items like depreciation recapture
Stock sale: buyer purchases your shares; gain is usually taxed at long-term capital gains rates if held over one year
Buyers prefer asset sales for a stepped-up basis, which allows higher depreciation deductions going forward
Sellers prefer stock sales for simpler tax treatment and lower rates — but deal structure is often negotiated

Spread taxable gain over multiple years as you receive payments instead of recognizing the full gain at once
Staying in lower brackets each year can reduce your effective rate and help avoid the 3.8% investment income surtax
You must charge adequate interest on the note or the IRS will impute interest, converting part to ordinary income
Carries credit risk — if the buyer defaults, you may have paid tax on gain you never collected

Section 1202 lets you exclude up to 100% of gain on QSBS — up to the greater of $10M or 10x your basis
Must be a domestic C corp with under $50M in gross assets at issuance, held for at least five years
Not all industries qualify — professional services, banking, farming, and hospitality are excluded
If you're an S corp or LLC, converting to C corp early starts the five-year holding clock before a sale

Defer capital gain by reinvesting proceeds into a Qualified Opportunity Zone Fund within 180 days of sale
Hold the OZ investment for 10+ years and any new appreciation is permanently tax-free
Only the gain portion needs to be reinvested — not the full sale proceeds — giving flexibility with the rest
OZ investments must be in designated low-income areas, so evaluate both the tax benefit and investment quality

Donating appreciated shares to a Donor-Advised Fund before closing avoids capital gains tax and earns a deduction
A Charitable Remainder Trust can sell assets tax-free inside the trust and pay you income over time
Timing matters — contributions must happen before the sale closes or the IRS treats it as a cash gift
Works best when you have real philanthropic goals and the donated amount fits your overall financial plan

An earn-out ties part of the price to future business performance — you get extra payments if targets are hit
Usually taxed as capital gains, but the IRS may reclassify as ordinary income if it looks like compensation
The installment method can apply to earn-outs, letting you defer gain until payments are received
Negotiate earn-out terms carefully — disputes over calculations are a top source of post-sale litigation

State taxes vary widely — California taxes gains as ordinary income up to 13.3%; Texas and Florida have no income tax
Relocating before a sale can help, but most states require a genuine change of residence well before closing
Coordinate across federal tax, state tax, estate planning, and charitable goals — they all interact
Assemble your team — tax attorney, CPA, financial advisor, M&A counsel — 12-24 months before a planned exit

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