Minimize Taxes on the Sale of a Business

Jarrett E. Hindrew, CFP®, ChFC®, CLU®
Financial Advisor, Creative Financial Group

Reducing the tax impact on the sale of your business requires careful planning and consideration of various strategies to maximize tax efficiency. Here are some key approaches to consider when selling your business:

Structuring the Sale:

• Asset Sale vs. Stock Sale — Depending on your business structure, consider whether an asset sale or stock sale would be more tax-efficient. Generally, a stock sale is better for the seller and an asset sale is better for the buyer. In a stock sale, the seller can realize the gain on their business at preferred capital gains tax rates. In an asset sale, any gains are exposed to the seller’s ordinary income tax rate on certain assets.


• Installment Sales — Structuring the sale as an installment sale can spread the gain over multiple years, potentially lowering the overall tax impact.

Deferring Capital Gains Tax:

• Qualified Small Business Stock (QSBS) — If your business meets certain criteria (e.g., assets less than $50 million, type of industry, etc.), you may qualify for QSBS treatment, which can provide substantial capital gains tax exclusions on the sale of qualified stock. The exclusion is limited to $10 million, or 10 times the basis of your initial investment, whichever is greater. QSBS is a type of share issued by a C corporation that meets the requirements of IRC Section 1202 and 1045. Note that businesses in the hospitality, personal services, financial sector, farming and mining are not eligible for QSBS treatment.


• Qualified Opportunity Zones (QOZs) — Investing in a QOZ in connection with a business sale can provide tax benefits and opportunities for capital gains deferral and reduction.
  
  If you roll over realized gains from the sale of your business into a QOZ within 180 days of the sale, you can defer paying taxes on those gains until the earlier of the date you sell your interest in the QOZ or December 31, 2026. Additionally, if you hold the QOZ investment for at least 10 years, you may further benefit by excluding capital gains from the underlying appreciation in the QOZ.


• Employee Stock Ownership Plans (ESOPs) — If your business is a C corporation, you can potentially sell your business to your staff through an employee stock ownership plan (ESOP). Selling your business to an ESOP can have tax advantages, including potential deferral or exemption from capital gains taxes. Section 1042 of the tax code grants a tax deferral on capital gains on eligible stock sold to an ESOP if the sale proceeds are reinvested or “rolled over” into qualified replacement property (e.g., common stock, preferred stock, bonds, etc.).

By implementing these strategies and seeking expert guidance, you can effectively reduce the tax impact on the sale of your business, optimize your financial outcome and minimize tax liabilities during the transaction. It is recommended to consult with your legal and tax professionals to ensure compliance with tax laws and regulations and to structure the sale in the most tax-efficient manner. Additionally, at Synovus we have an experienced team of professionals who can assist with your questions and help plan for your business transition, designed to ensure that you reach your goals.