Tax Implications of Selling Your Business: What to Know

IRS Circular 230 Disclosure: We do not provide tax advice. Any discussion of U.S. tax matters is not intended or written to be used for the purpose of avoiding U.S. tax-related penalties and is created solely for illustrative purposes. Reach out to your tax advisor with tax-related questions.

Selling your business is a major financial event — and the way the deal is structured can have a significant impact on how much you actually keep after taxes. Whether you’re selling a business in Scottsdale, Phoenix, Arizona, or nationally, understanding the tax implications of a business sale is critical to maximizing your net proceeds.

This guide outlines the key tax factors every seller should know and why working with your investment banker, tax advisor, and M&A attorney early in the process is essential.

1. Asset Sale vs. Stock Sale: Key Tax Differences

One of the first major decisions in any M&A transaction is whether it will be structured as an asset sale or a stock (or membership interest) sale.

Asset Sale

• Buyer purchases specific assets (e.g., equipment, contracts, goodwill) and assumes selected liabilities.

• More common in small to mid-sized private company sales.

• Seller faces taxes on the sale of individual assets, potentially resulting in a combination of ordinary income and capital gains rates.

Stock Sale

• Buyer purchases ownership interests (e.g., stock or LLC membership units) in the business entity itself.

• More common in larger M&A transactions or when selling corporations.

• Seller typically receives capital gains treatment on the full sale proceeds, which may be more tax-efficient.

Negotiating deal structure early can dramatically affect the total taxes paid by the seller.

2. Capital Gains Tax Considerations

In most cases, proceeds from a business sale qualify for long-term capital gains treatment if the business has been held for more than one year.

• Federal long-term capital gains rate: Typically 15% to 20%, depending on income level.

• State capital gains treatment: Arizona generally follows federal rules but applies its own state income tax.

For sellers in Arizona and other states, factoring in both federal and state taxes is essential when calculating after-tax proceeds.

3. Ordinary Income Tax Traps

Not all sale proceeds may qualify for favorable capital gains rates. Certain components of a deal could trigger ordinary income tax, which is taxed at a higher rate:

• Depreciation recapture from sold assets (e.g., equipment, real estate).

• Earnouts tied to future business performance.

• Consulting agreements tied to post-closing services.

Without proper structuring, sellers may unintentionally expose large portions of the sale price to ordinary income taxes, significantly reducing net proceeds.

4. Allocation of Purchase Price Matters

In asset sales, the allocation of the purchase price among different asset classes is critical because it determines how different parts of the proceeds are taxed. Common allocation categories include:

• Inventory (ordinary income)

• Equipment and tangible assets (depreciation recapture)

• Goodwill and intangibles (capital gains)

Buyers and sellers typically negotiate this allocation, so having an M&A attorney and tax advisor involved early protects your tax position.

5. State Taxes and Nexus Considerations

In addition to federal taxes, business sellers must consider state-level taxes:

• Arizona imposes state income tax on business sale proceeds.

• Other states where the business operates could claim a portion of the taxable gain based on nexus (business presence) rules.

Selling a business with multi-state operations could trigger apportionment of income among several states, each with different tax rates.

6. Installment Sales and Deferred Tax Planning

Sellers may use strategies like installment sales to spread tax liability over multiple years:

• Only the portion of proceeds received each year is taxed.

• Helps manage income spikes and avoid being pushed into higher tax brackets.

However, installment sales carry risks (e.g., buyer default), so they must be carefully structured.

Other tax strategies include:

• Charitable trusts or donor-advised funds

• Qualified Small Business Stock (QSBS) exemptions for eligible C corporations

• Like-kind exchanges for certain asset sales (e.g., real estate)

7. Why Early Tax Planning Matters

The earlier tax planning starts, the more options a seller has to optimize deal structure, minimize tax exposure, and maximize net proceeds. Working closely with your:

• Investment banker (to structure the deal)

• M&A attorney (to negotiate sale terms)

• Tax advisor (to model after-tax outcomes)

is essential for a successful exit.

Final Thoughts

Selling a business is not just about the headline price — it's about how much you keep after taxes. Whether you’re selling in Phoenix, Arizona, or nationally, understanding the tax impact and structuring the deal strategically is key to preserving your hard-earned value.

At William & Wall, we help business owners plan for valuation and deal structuring, working hand in hand with your business tax advisor to understand tax implications from the start. Contact us today.