How Do You Lower Capital Gains Tax When Selling a Company?

Key Takeaways

• Long-term capital gains on assets held more than one year are taxed federally at 0%, 15%, or 20%, depending on taxable income.
• Higher earners may also owe the 3.8% net investment income tax (NIIT) under IRC Section 1411 when modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly).
• Not all sale proceeds are capital gain: depreciation recapture, inventory, and non-compete payments are generally taxed as ordinary income.
• Legal ways to reduce capital gains tax or defer it include installment sales, QSBS, ESOP sales under IRC Section 1042, charitable remainder trusts, and Qualified Opportunity Fund investments.
• Most strategies must be set up before a binding sale agreement is signed.

You lower capital gains tax on a company sale by maximizing the share of the price taxed at long-term capital gains rates, spreading or deferring the gain, and using exclusions such as QSBS where they apply. Installment sales, charitable trusts, ESOP sales, and Opportunity Fund investments can reduce or delay the tax if they are set up in time.

Capital gains tax is often the largest single cost of selling a company. Certified Maverick, the certification and directory network for tax strategists founded by David A. Perez, trains advisors to model these taxes before a sale. This guide explains how the tax works and which strategies are available.

How Are Capital Gains on a Business Sale Calculated?

Capital gain equals the amount realized from the sale minus your adjusted basis. For stock, basis is usually what you paid plus later contributions. For a business sold as assets, each asset has its own basis and its own tax treatment.

Does the 3.8% Net Investment Income Tax Apply?

Often, but not always. The NIIT applies to investment income, including many capital gains, when modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples filing jointly. These thresholds are not adjusted for inflation. Owners who materially participate in an S corporation or partnership may be able to exclude part of the gain on selling their interest, to the extent it relates to active business assets.

What Are the Main Ways to Lower Capital Gains Tax?

• Hold assets more than one year. Long-term rates are much lower than ordinary income rates.
• Negotiate the price allocation. In an asset sale, more allocation to goodwill generally means more capital gain and less ordinary income.
• Use an installment sale. Under IRC Section 453, gain is taxed as payments are received, which can keep more of it in lower brackets.
• Claim the QSBS exclusion if eligible. IRC Section 1202 can exclude up to 100% of gain on qualifying C corporation stock.
• Sell to an ESOP. C corporation owners who sell at least 30% of the company to an ESOP may defer gain under IRC Section 1042 by reinvesting in qualified securities.
• Use a charitable remainder trust. Contributing shares to a CRT before a binding sale lets the trust sell without immediate tax and pay you income over time.
• Invest in a Qualified Opportunity Fund. Investing capital gains within 180 days can defer tax and, if held long enough, exclude appreciation on the new investment under IRC Section 1400Z-2.
• Harvest capital losses. Losses from other investments in the same year can offset gains.
• Consider rollover equity. In some private equity deals, part of the price is paid in buyer equity, which may be structured to defer tax on that portion.

Can You Use a 1031 Exchange When Selling a Business?

Generally, no. Since 2018, IRC Section 1031 like-kind exchanges apply only to real property held for business or investment. Business stock, equipment, and goodwill do not qualify. Business real estate sold as part of a deal can still qualify if it is exchanged for other real property under the 1031 rules.

Why Does Timing Matter?

The IRS applies the assignment-of-income doctrine. If a sale is already legally binding, moving shares into a trust or donating them may not shift the tax. That is why charitable transfers, gifting, and many other strategies must happen before a letter of intent becomes a binding agreement. Holding periods for QSBS and long-term capital gains also need to be checked well before closing.

What Are the Risks and Limitations?

Each strategy has trade-offs. Installment sales leave you exposed to buyer default. A charitable remainder trust is irrevocable. ESOP sales require a C corporation and involve valuation and trustee requirements. Opportunity Fund investments carry investment risk and strict timing rules. State taxes add another layer: some states tax capital gains as ordinary income, and moving states just before a sale is often audited.

What's the Bottom Line?

Capital gains tax on a company sale depends on how much of the price is long-term capital gain, your income level, and the 3.8% NIIT. Installment sales, QSBS, Section 1042 ESOP sales, charitable remainder trusts, and Opportunity Fund investments can reduce or defer the tax when their requirements are met. Because most of these strategies must be in place before a binding agreement, planning should start well before a sale.

Frequently Asked Questions