Retirement should be a reward for years of risk-taking, long hours, and wise decisions. Yet for many business owners, the financial stakes are never higher than in the years leading up to retirement. Selling a business or transitioning ownership is more than just a liquidity event. It’s a complex process filled with tax traps and planning opportunities.
If you do it right, you may secure the financial legacy you’ve worked hard to build. If you do it wrong, you might leave significant money on the table.
Here’s a guide to tax strategies to help you exit on your terms, with more of your wealth intact.
Start early, preferably five years in advance
Planning for taxes related to retirement or selling a business shouldn’t be done hastily. It’s best to start at least three to five years before you plan to make your exit. Many strategies require time to set up and must align with specific holding-period rules.
Starting early allows you to manage your income better, avoid hitting higher tax brackets, and change your business structure if necessary.
Consider the structure of your business
Your business entity determines how taxes will apply on exit. If you’re a C corporation, be prepared for double taxation: once at the corporate level when the business is sold and again at the personal level in distributions.
Converting to an S corporation can help, but beware the built-in gains tax if the conversion occurs less than five years before the sale.
Pass-through entities (S corps or LLCs) generally pass gains through to your return, where they can qualify for long-term capital gain rates.
Asset sale or stock sale: it makes a difference
Buyers often prefer asset sales because they step up the asset basis for depreciation. Sellers usually want a stock sale to secure capital gains treatment and avoid double taxation. The structure matters. Goodwill and non-compete payments may be taxed as ordinary income in asset sales, while stock sales usually get long-term capital gains treatment.
Use installment sales to spread out the gain
To manage significant tax liabilities, structure the sale as an installment sale and recognize gain only when receiving payments. The key rule is: “An installment sale is a sale of property where you’ll receive at least one payment after the tax year of the sale”. Depreciation recapture must still be reported in the year of sale.
Take advantage of the qualified small business stock (QSBS) exclusion
Under Section 1202, owners of qualified small business stock may exclude a portion of their gain from federal tax, subject to specific requirements.
To qualify, the stock must be acquired at original issue from a C corporation with no more than $75 million in gross assets. The company must meet active business requirements, and the stock must be held for at least three years.
Gains on stock held for three years qualify for a 50 percent exclusion, four years for 75 percent, and five years for the full 100 percent exclusion—provided the stock was issued after July 4, 2025, and meets the new OBBBA criteria.
The cap on eligible gain has increased to the greater of $15 million or ten times the investor’s basis for stock issued post-Act. For stock issued pre-Act, the limitation is $10 million or 10 times the shareholder’s tax basis, with no inflation adjustment.
These enhancements were enacted in the One Big Beautiful Bill Act, which was signed into law on July 4, 2025.
This remains among the most powerful tax benefits available to founders, early employees, and investors in qualifying startups.
Shift shares to family members in lower tax brackets
Transferring non-voting shares to adult children or grandchildren can shift capital gains into lower brackets. Be cautious of kiddie tax rules for those under age 24.
Also, the lifetime gift and estate tax exemption increased to $15 million per person ($30 million per married couple) starting in 2026 under the One Big Beautiful Bill Act, indexed annually for inflation.
Use charitable strategies to offset gains
Charitable giving can reduce capital gains taxes. A Charitable Remainder Trust (CRT) can hold your business stock.
The trust sells it tax-free and pays you income for life. A donor-advised fund (DAF) may also help. You receive a deduction for the fair market value and avoid tax on gains. Both require planning and compliance.
Watch out for the net investment income tax
If your adjusted gross income exceeds $250,000 (married jointly), a 3.8% Net Investment Income Tax (NIIT) may apply to sale proceeds. Modeling your income and gains with a tax advisor can help limit or avoid this tax.
Don’t forget state and local taxes
Many states have their own capital gains rules. Others conform to federal rates. You’ll need to navigate multiple tax jurisdictions if your business operates across states. In some cases, changing your state of residence before a sale may save taxes, but only with bona fide relocation documentation.
Coordinate with your estate plan
Your business may be your most significant asset. Exiting the business provides an opportunity to revisit estate plans. Trusts like Spousal Lifetime Access Trusts (SLATs) or Intentionally Defective Grantor Trusts (IDGTs) should be considered to transfer future appreciation tax-efficiently. If transferring the business, use intentionally defective trusts or grantor retained annuity trusts with valuation discounts to preserve operational control while shifting wealth.
The bottom line
There’s no one-size-fits-all solution when preparing to retire or sell a business. Tax rules evolve, and individual situations differ. Preparation is universal. Don’t wait until the deal is on the table. Working with your CPA, attorney, and financial advisor three to five years out can mean the difference of hundreds of thousands, or even millions of dollars for retirement, heirs, or charitable giving.
Additional Notes:
How Tax-Loss Harvesting Can Help After a Business Sale
When you sell a business, much (if not all) of the proceeds are typically taxed as capital gains, which can create a very large tax bill in the year of sale. One of the few effective strategies available to reduce that bill is tax-loss harvesting.
What it is:
Tax-loss harvesting involves selling investments in your portfolio (stocks, funds, etc.) that are currently worth less than what you paid for them, intentionally realizing a capital loss.
How it works against your business gain:
- The IRS allows you to use realized capital losses to offset realized capital gains.
- Losses offset gains dollar-for-dollar, so if you realize a $1,000,000 capital gain from your business sale and you’ve harvested $200,000 of losses in your portfolio, you only pay tax on $800,000 of net gain.
- If your losses exceed your gains, you can use up to $3,000 per year to offset ordinary income, and the rest carries forward indefinitely.
Why it matters for a business sale:
- Because the sale of a business can push you into the highest capital gains brackets (15–20% federal, plus 3.8% net investment income tax, plus potential state taxes), every dollar of harvested loss could save 20–30+ cents in taxes.
- Tax-loss harvesting gives you more control and flexibility to reduce the immediate tax impact of the sale, especially when paired with other planning strategies like charitable giving, installment sales, or opportunity zone investing.
Example:
- Business Sale Gain: $2,000,000
- Harvested Losses: $300,000 from your portfolio
- Net Taxable Gain: $1,700,000
- At a 23.8% federal capital gains rate, this saves about $71,400 in taxes.
