How to Avoid Capital Gains Tax When Selling a Business: Smart Strategies for Owners

Selling a business you’ve spent years building is a major milestone—and often, a highly profitable one. But if you’re not careful, capital gains tax can take a sizable chunk out of your earnings. Fortunately, there are strategies available to help minimize or even avoid capital gains tax when selling a business, if you plan ahead.

At Hogan CPA Financial Services, we work with business owners to structure tax-efficient exits, ensuring they retain as much value as possible from the sale of their life’s work. Below, we’ll break down how capital gains tax works—and the key tactics to help reduce your liability.

What Is Capital Gains Tax on a Business Sale?

When you sell your business for more than your adjusted basis (i.e., your original investment plus improvements minus depreciation), the IRS considers the profit a capital gain. If you’ve held the business for more than a year, you’re typically subject to long-term capital gains tax, which is lower than ordinary income tax rates—but still significant.

The rate can vary depending on your income, sale structure, and entity type. Without proper planning, you could face a tax bill that eats into a large portion of your hard-earned proceeds.

1. Structure the Sale Wisely (Asset vs. Stock Sale)

The way your business is sold has a major impact on your tax liability. Sales are typically structured as either:

Asset Sales: You sell individual business assets (equipment, inventory, customer lists, etc.). These are more common with LLCs or sole proprietorships.
Stock Sales: You sell shares in a corporation (common with C or S Corps), and the buyer assumes ownership of the entire entity.

From a tax perspective, stock sales often offer better capital gains treatment for the seller, while asset sales may result in ordinary income tax on certain items (like receivables or depreciated equipment).

A knowledgeable small business CPA can help you determine the structure that protects your interests and minimizes your tax burden.

2. Use an Installment Sale to Spread the Gain

Instead of receiving the full sale price upfront, consider spreading the payments over several years. An installment sale lets you defer portions of the capital gain, reducing your tax burden in any one year and potentially lowering your tax rate if you’re in a high-income bracket.

This strategy works well if you trust the buyer to make payments over time and want to avoid a lump-sum tax shock.

3. Consider a Section 1202 Exclusion (For C-Corps Only)

If you own a qualified small business stock (QSBS) in a C corporation and meet certain conditions (including holding the stock for more than 5 years), you may be able to exclude up to 100% of capital gains under Section 1202.

This is a powerful tax tool, but it comes with strict requirements, so early planning is essential.

4. Reinvest Proceeds Through a 1031 Exchange (For Real Estate)

If part of your business sale includes commercial real estate, you may be able to defer capital gains by reinvesting the proceeds into another like-kind property through a 1031 exchange, while also managing transfer taxes in real estate. This applies to real estate assets—not goodwill or inventory—and allows you to grow your wealth tax-deferred.

If real estate plays a big role in your exit, our team can guide you through specialized small business tax planning and compliance strategies.

5. Maximize Deductions and Losses Before the Sale

Before the sale closes, take time to accurately analyze income, expenses, and financial trends to identify areas for tax optimization. Writing off eligible business expenses or recognizing losses ahead of the sale can offset gains and reduce your overall liability—especially when you understand what percentage a small business pays in taxes.

This requires a deep understanding of your books and careful coordination between your CPA and legal team.

6. Gift or Transfer to Family Strategically

If you’re thinking long-term, transferring ownership to family members or gifting shares to heirs can reduce estate taxes and allow for future income splitting—though this also requires careful tax planning.

Plan Ahead for a Tax-Smart Business Exit

Avoiding capital gains tax when selling a business isn’t about finding loopholes—it’s about proactive, strategic planning with the right guidance. From deal structure to post-sale reinvestment, every step of your exit can either protect your profits—or expose them to unnecessary tax liability.

At Hogan CPA Financial Services, we specialize in helping small business owners navigate complex financial transitions with confidence. Whether you’re months or years away from selling, we’ll help you build a clear plan aligned with your personal and business goals.