Chances are, you’ve invested enormous time and energy into your business. And if you’re like many entrepreneurs, you’ll one day be ready to sell the company and transition to the next chapter of your life.  

If so, it makes sense to make your exit in a way that minimizes the tax bite you’ll encounter. Despite their many differences in goals and methods, business owners often agree that they want to pay as little as legally possible in taxes when they eventually sell their companies so they walk away with more money for themselves and their families.  

The good news: Numerous strategies can potentially help mitigate taxes on the sale of your company.  

Transfer assets regularly over time  

Have heirs who will one day take over the business? You can start gifting them that ownership now. Individuals can transfer up to $17,000 (while married couples can transfer up to $34,000) of stock in their company to each child every year without incurring taxes. (For 2023 limits for 2024 were not yet available as of this writing.) *Giving the annual limits on such gifting, it’s unlikely that this basic approach will enable you to fully transfer ownership to one or more heirs. But it can get the ball rolling on tax mitigation.  

Installment sale  

Selling your business may result in a profit that bumps you into a higher income tax bracket than usual. That could mean a significantly larger tax bill than you expect or want. To avoid that outcome, you could consider agreeing to be paid over time by the buyer in regular installments instead of a one-time transaction. After getting an upfront payment, you’d receive the remaining sale proceeds (with interest) over annual installments. This approach would spread your tax bill throughout the installment payments.  

The length of the installment period is negotiable between you and the buyer. But obviously, the longer the term, the greater the risk you could incur. Because you’re getting payments over time rather than all at once at the sale, you’re relying heavily on the new owner. If they run the company into the ground, you may have far less money than you expected.  

The installment sale option is often closely watched due in part to frequent proposed legislative changes involving capital gains taxes. For example, one debated proposal would increase the top long-term capital gains tax rate from 20 percent to 39.6 percent for households with income of more than $1 million. Although that bogey might seem high—by one estimate, just 539,000 income tax returns were filed in 2019 with 2018 adjusted gross income of more than $1 million—it’s quite possible for business owners to hit it in the year they sell their companies.  

*For 2023 (limits for 2024 were not yet available as of this writing)

In theory, an installment sale could be designed to keep your annual income below the $1 million threshold each year—helping to avoid the higher capital gains tax rate (if it comes to pass).  

Warning: Only “capital gains income” is eligible for installment sales. Anything on which gains are treated as ordinary income cannot be used in installment sales. For these items — which include inventory, accounts receivable and property that’s been used for one year (or less) — you have to pay tax on any gains in the year you sell the company. Best bet: Review IRS guidelines and discuss with a tax expert if you are considering installment sales.  

Opportunity Zones  

Another tax-advantaged option is to reinvest some or all of the sale proceeds into a qualified opportunity zone fund.  

Opportunity Zones are federally-categorized areas of the country with historically depressed economic growth levels and historically high poverty levels. Qualified opportunity zone funds are investment vehicles that invest in properties and businesses located in these Opportunity Zones. Their purpose is to help spark economic growth and jobs in these distressed communities (of which there are currently more than 8,000).  

The IRS offers significant tax advantages to help motivate investors to allocate money to these funds. Example: If you sell your business (or stock or real estate) and reinvest some or all of the proceeds in a qualified opportunity zone fund within 180 days of generating a capital gain from the sale, you can defer paying taxes on that gain. In general (exceptions exist), the deferral lasts until Dec. 31, 2026 — at which time, the amount of the deferred gain that you invested in the fund becomes taxable.  

Also, if you maintain your qualifying investment for more than 10 years, its tax basis “steps up” to its fair market value as of the date you sell it. In short, your investment appreciates tax-free—and you won’t pay any capital gains tax on the appreciation when you sell it.  

Charitable remainder trusts  

If you want to both reduce your tax bill when selling and have a philanthropic impact by financially supporting a cause you care about, you may be well-served by using a charitable remainder trust (CRT).  

This approach calls for irrevocably gifting some or all of your business to a CRT that you  create to benefit one or more charitable organizations. The CRT can then sell the business interests — without incurring any capital gains taxes.  

In addition, you would receive an income tax deduction in the year you transfer the business assets to the CRT. The size of that charitable deduction could potentially total tens of thousands of dollars, depending on the value of the business interests being transferred, your age, your adjusted gross income (the allowable deduction is limited to 30 percent of your adjusted gross income, with excess amounts carried forward for five years) and other factors.  

Conclusion  

The four strategies presented here represent just a portion of the tax-mitigation solutions available to entrepreneurs looking to sell their businesses. Additionally, as noted, several methods for reducing taxes are being examined and assessed by lawmakers in the White House and on Capitol Hill, but what (if anything) will change remains to be seen.  

Your best bet: Reach out to your trusted advisors to review the full range of tax-mitigation resources available to you and get updated on the latest developments impacting a particular solution.   

Keven P. Prather is a registered representative of and offers securities and investment advisory services through MML Investors Services, LLC. Member SIPC. Call 216-592-7314, send an email to kprather@financialguide.com or visit transitionextadvisors.com.