How to Avoid Capital Gains Tax on a Business Sale

There’s much to consider when selling a business, and tax planning often tops the list. When you sell a business or business assets at a profit, the IRS expects to receive a cut via the capital gains tax. This could potentially result in a larger-than-expected tax bill. If you’re considering selling your business, these tips can help you avoid capital gains tax on a business sale.

For more help managing capital gains taxes or any other financial issues, consider working with a financial advisor.

How Is the Sale of a Business Taxed?

The sale of a business or business assets is generally subject to capital gains tax. Capital gains tax is a tax that’s assessed when you sell an asset for more than its basis, or what you paid for it.

The IRS levies two types of capital gains tax: short term and long term.

Short-term capital gains tax. The short-term capital gains tax rate applies to assets held for less than one year and are taxed as ordinary income. Therefore, you use your business’s normal tax bracket when calculating short-term capital gains tax.
Long-term capital gains tax. Long-term capital gains receive more favorable tax treatment, applying to assets held over one year. The current long-term capital gains tax rates are 0%, 15% and 20%, depending on income, although some exceptions do apply.

When applying capital gains tax rules to the sale of a business, the IRS typically looks at the individual assets of the business. This applies for businesses structured as sole proprietorships, partnerships or limited liability companies (LLCs).

Instead of viewing your business as a single asset or entity, the IRS considers all of the assets the business owns. This can include several types of assets:

Real estate
Property leases
Equipment or machinery
Raw materials and supplies
Intellectual property, such as trademarks, patents and copyrights

The capital gains tax rate you pay on the sale of those assets depends on how long you have held them. However, it’s important to note that certain assets, such as inventory or accounts receivable, are taxed as ordinary income rather than capital gains.

How Allocation of Sale Price Affects Taxation

When you’re finalizing the purchase agreement with a buyer, part of the negotiations involves choosing a sale price. This must be done for each tangible and intangible asset belonging to the business. When you sell your business, your total tax liability hinges largely on how you allocate the sale price of individual business assets.

This is a crucial step of the process because the purchase price you set for each asset will help determine your overall capital gain (or capital loss). It also establishes the buyer’s basis for each asset purchased. While this is less important for your tax situation, it’s still important to consider that the buyer is also likely angling for the most favorable tax treatment when negotiating prices.

When determining how to avoid capital gains tax on a business sale, it requires careful planning in order to maximize profits while minimizing tax.

Under Section 1060, the IRS offers guidelines on how to value assets and determine an appropriate purchase price that also helps manage overall tax liability. Generally, you allocate the purchase price to assets in this order:

Cash and deposits held in checking or savings accounts
Actively traded personal property, such as certificates of deposit (CDs) and publicly traded stock shares
Receivables
Inventory and stock in trade
Furniture, fixtures, buildings, land and other assets that don’t fit in any other asset class
Intangible assets, other than goodwill and going concern
Goodwill and going concern value

Again, keep in mind that the buyer will be looking to allocate more of the purchase price toward assets that will depreciate quickly, as that can yield more tax benefits on their side.

How to Avoid Capital Gains Tax on a Business Sale

Can you completely avoid capital gains tax when selling a business? Not necessarily. However, it’s possible to reduce the amount you may owe in capital gains tax with some strategic planning.

Talking to your financial advisor or a tax professional is a good place to start. They can help you to determine if any of these tax reduction strategies might work in your situation.

Negotiate wisely.You and the buyer will have competing interests regarding the allocation of the purchase price. Per the IRS rules, you’re better off allocating more of the price to capital assets rather than depreciating assets. Therefore, it’s important not to rush the negotiation process so you receive the most favorable allocation.
Consider an installment sale. An installment sale allows you to receive payment for a qualifying capital asset over time instead of all at once, recognizing capital gains as each payment is received rather than in a single year. This does not eliminate capital gains tax, but it can spread the liability across multiple tax years and potentially reduce the impact of higher income brackets. Only capital assets are eligible for installment sale treatment, meaning items such as cash, inventory, accounts receivable and certain recapture income are excluded and generally taxed immediately.
Watch the timing. If you are selling a newer business, timing is critical as it can determine whether you pay the short-term or long-term capital gains tax rate. Holding on to the business and its assets for at least one year before selling can help you benefit from more favorable long-term capital gains tax rate.
Explore Opportunity Zone reinvestment. Business owners may be able to defer capital gains tax through Dec. 31, 2026, by reinvesting eligible capital gains from the sale of a business into a qualified opportunity zone within 180 days of the sale, provided the investment is not sold before that date. This strategy does not eliminate capital gains tax but delays when it is owed. Only the capital assets portion of a business sale qualifies for this treatment, and certain types of businesses and income, such as inventory, receivables or excluded business activities, do not qualify for opportunity zone deferral.
Pre-sale tax and valuation planning. Effective tax management begins long before you sign a sales agreement. By preparing the business for sale several months or even years ahead, you can have more control over both valuation and tax outcomes. A structured pre-sale plan can help clarify what the business is worth, how proceeds will be taxed and which parts of the transaction can be optimized.

The first step is to determine a reliable business valuation. This involves reviewing financial statements, normalizing owner compensation and assessing tangible and intangible assets, such as customer contracts and intellectual property. A professional valuation can help set realistic expectations for sale price while identifying areas where restructuring can improve tax efficiency.

The ownership structure also matters. The type of business you have, such as a sole proprietorship, partnership or C corporation, affects how the IRS treats gains. For instance, asset sales in C corporations are subject to double taxation unless structured carefully. Reviewing your entity type before the sale can open opportunities to convert to a more favorable structure or use pass-through taxation to minimize total liability.

Another key step is reviewing depreciation schedules, leases and debt obligations. If you adjust the depreciation of certain assets or refinance high-interest debt before the sale, this can affect your business’s book value and how buyers perceive risk. This preparation can improve both the sale price and your after-tax proceeds.

Finally, plan for the personal side of the transaction. Estimate your projected capital gains, and model how proceeds will affect your personal income bracket. Don’t forget to explore tax deferral options, such as Qualified Opportunity Funds or installment agreements.

Bottom Line

Two financial advisors reviewing a business sale.

There are many reasons why you might decide to sell a business. Maybe you’re ready to retire, or perhaps, you want to move on to a new venture. In any case, it is important to keep tax planning at the forefront. Consulting with a tax expert can help you to flesh out a plan for how to avoid capital gains tax on a business sale or, at the very least, minimize what you owe.

Tax Planning Tips

Consider talking to your financial advisor about the potential financial implications of selling a business. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Use SmartAsset’s tax return calculator to get a quick estimate of how your income, withholdings, deductions and credits impact your tax refund or balance due amount.
In addition to planning for federal taxes on the sale of a business, it’s also important to consider what you might owe in state taxes. If you do business in a state that doesn’t assess income tax, then you might be at an advantage. But if not, then you’ll also need to consider how you can reduce the amount of tax you might owe on the sale. Again, there’s where talking to a tax professional who’s well-versed in your state’s tax laws can help.