Different types of business sales can have dramatically different outcomes. After valuing a company and a potential buyer wants to purchase the business, the next step is structuring the type of sale between the buyer and seller. One of the most important goals for sellers is to minimize the amount of taxes on the sale. While it sounds easy, the actual structure of the deal could dramatically change your taxes.
How Businesses are Taxed
To oversimplify it, there are two ways that taxes can apply to a business sale. Either proceeds will be taxed at capital gains rates or taxed as ordinary income. Many sellers may prefer the lower capital gains rate over their ordinary income tax rate. In 2025, the capital gains rates are 0%, 15%, and 20% (depending on taxable income). If any potential sale is more than $600,050 for a married business owner, they will likely pay a 20% capital gains rate plus potentially an extra 3.8% net investment income tax.
Taxes are slightly less advantageous if sale proceeds are taxed as ordinary income. Usually, business owners selling their business for hundreds of thousands or millions will already have a significantly higher income tax rate. Passing $206,700 in taxable income in 2025 would have a marginal federal income tax rate of 24%. As of now, the top marginal tax rate is 37% for married couples with income above $750,600. Selling a business for $1,000,000 on top of all the other income in the household would easily reach the top rate in the year of the sale.
Most business transactions, when completed, will have at least some taxes at capital gains rates, but some deals include ordinary income tax as well, depending on the type of sale. The IRS has outlined the different tax consequences depending on “what gets sold”. For example, selling inventory to a buyer would be taxed as ordinary income to the seller. Alternatively, selling equipment could be taxed as capital gains. There are many rules and regulations from a tax perspective, so it is important to ask a tax advisor about any specific situation.
Different Types of Business Sales
The type of transaction plays a major role in the negotiations and eventually the sale price of the company. To get a better idea of the taxes, a sale will occur in one of two ways:
- Asset Sale
- Stock Sale
An Asset Sale involves selling the assets of the company, but not necessarily the company itself. Most sales are structured this way and will lead to a mix of both capital gains tax and ordinary income tax. Buyers prefer these types of deals because they usually do not have to take on any liabilities of the company, as well as gain access to depreciation deductions. Therefore, part of the negotiation process is to determine what type of assets are being purchased (like inventory) and determine how that is taxed.
A Stock Sale can be more favorable for sellers, since they sell the stock of the entire company as opposed to the individual assets. These deals typically fall completely to capital gains rates, and the sale of an equity stake for sellers is usually preferred to ordinary income. Whether buyers will adopt any current liabilities and lose out on depreciation would be part of the negotiation process.
A major factor in determining which sale type is better also depends on the entity structure of the company. Sole Proprietorships, Partnerships, and certain LLCs must use asset sales. This is why most sales are made as asset sales and not stock sales, since most companies fall into one of these entities. However, both C and S corporations can decide which sale type is best.
How to Reduce Taxes
From a tax planning perspective, sellers may find negotiating for a stock sale beneficial, depending on entity type and transaction details. Since every non-incorporated company must sell its business as an asset sale, the quest to reduce taxes can be more difficult. Negotiations will include categorizing all the assets into one of three buckets: capital assets, depreciable property, and real property (like inventory). The more assets that can be categorized as capital assets can be sold based on capital gains tax rates. Likely, the final transaction will include a mix of all three buckets, known as the Purchase Price Allocation. It’s reasonable to expect a split between capital gains tax and ordinary income tax.
A C-Corporation is not a pass-through entity and has a 21% flat corporate tax rate. An asset sale would not only be subject to the corporate tax rate, but once proceeds are distributed, it would be taxed again at the seller’s tax rate as a dividend. A stock sale, on the other hand, would be preferable because only capital gains rates would apply and would bypass the corporate tax rate entirely. Similar to just buying stock in a public company and later selling it, only capital gains tax would apply to the sale.
From this point, focusing on maximizing deductions would be the main goal to lower taxes. With proper tax planning, many owners can dramatically reduce their taxable liability. For example, the Qualified Small Business Stock (QSBS) could nearly eliminate all capital gains tax but would require years of planning. Alternatively, taking proceeds and rolling them into other like-kind investments could help defer taxes as well (1031 exchanges, etc.). As always, work with your accountant and advisor to make sure your specific situation takes all of these variables into account.
Selling Is Not Easy
When owners get to the point of finally selling their business, there can be a lot of moving pieces before signing on the dotted line. It is important to clearly understand how the taxes will affect any take-home profits of selling a business. The way the deal is structured and the way the company is structured can have a significant impact on your taxes, and it is vital to understand how. Then, focusing on reducing the tax burden by proactive measures can ultimately help you transition away from the business and onto the next adventure.
TC Falkner 