Tax Implications of Selling Your Business

By Don Beezley © 2025

Taxes are typically of great concern to an owner when they sell their business. After years or decades of hard work, you have a partner in the form of government swooping into take a piece of the action. Understandably, you want to minimize that piece.

Nothing herein should be construed as tax or legal advice and is for general educational purposes only. Always seek proper tax and legal advice from a qualified attorney and tax advisor when buying or selling a business.

We also touched on taxes in the paper discussing stock versus assets, so we are just hitting some general notes here:

Stock versus assets may have different tax treatments:

1. Generally speaking, stock (or “equity”) sales are capital gains taxed
2. Generally speaking, asset sales are a mix of capital gains and personal tax rates
   1. Even in a stock sale, it can be structured to be taxed as an asset sale (the most common form being what is called a “338 Election”)
3. In a C Corporation, in an asset sale, you may be faced with two levels of taxation—one at the corporate level when the corporation sells the assets, and again at the individual level, versus in a stock sale, you may only face the gain on the stock you sell as an individual

Who Benefits?

The Buyer and Seller tend to be on opposite sides of the tax issue. For example, in an asset sale, the Buyer gets the full benefit of future deprecation of the various assets purchased at the value to which the parties agree (see Purchase Price Allocation, below), whereas in a Stock/Equity sale they may not. In an asset sale, the more value given to various assets has more depreciation (tax reduction) benefits for the Buyer but will likely increase the amount of the sale that results in personal tax rates for the Seller (versus capital gains tax rates that may be lower).

Purchase Price Allocation

As discussed elsewhere, in an Asset Purchase the Buyer’s entity is buying the Assets of the Seller’s business, not the Sellers corporate entity (C Corp, S Corp LLC, etc.). As a result, in the Purchase Agreement the parties must agree to what values are being assigned to the various assets being purchased.

There are seven Asset Classes defined by the Internal Revenue Service, and both parties will file form 8594 with the IRS when they file taxes after Closing indicating what was agreed to. The most common in a small business sale are:

• Class IV: Inventory
• Class V: Other Assets not in Class I-IV
• Class VI: Intangibles besides Goodwill such as an interest Customer Lists, Supplier Contracts, Non-Competes
• Class VII: Goodwill. Goodwill is the new asset created in a sale for that part of the Purchase Price that is not allocated to any other asset class

Deal structure

The way in which a deal is structured may change how or when it is taxed. The general rule is that you are only taxed when you receive the money. The simplest example is a Seller’s Note. If you finance part of the transaction for the buyer and they pay you over time, the tax you owe on that portion of a sale will likely be due in the future when you actually receive the payments.

Deferred Sales Trust

There are various strategies for minimizing or deferring taxes. One is called a Deferred Sales Trust. In a nutshell, the proceeds from the sale go into a trust managed by a third party and you are taxed as it distributes to you. The advantage, besides deferring the impact of the tax on the sale, is that the money you would have paid in taxes instead stays in the trust earning a return for you.

Not surprisingly, there are almost endless combinations that can affect the final tax bill on a sale. It’s essential you consult qualified tax and legal advice on the Purchase Agreement. It will dictate the rules of the game for your sales and, as a result, the tax implications. It’s also essential that the parties be reasonable. It’s rare that one party or the other can achieve all of the best possible tax benefits at the expense of the other party.

Visit www.IRS.Gov for more details on Asset Classes and other tax related matters.

Don Beezley is President of Proforma Partners, LLC and a Business Certified Appraiser (BCA) with over three decades of M&A, banking, and business operations experience.