Selling Your Business? Start Tax Planning Two Years Before the Sale

If you're a business owner thinking about retirement, your company is likely your biggest asset. When the time comes to sell, the tax bill can be shocking-unless you've planned ahead.

Here's what most business owners don't realize: the best tax moves happen before you sign the purchase agreement, not after. Starting two years out gives you time to implement strategies that could meaningfully reduce what you owe to the IRS.

Key Takeaways

Tax planning for a business sale isn't something you do in the final weeks before closing.

• A two-year planning window lets you implement strategies that require time to work (like income timing and entity restructuring)
• The type of sale structure-asset sale versus stock sale-creates vastly different tax outcomes
• Certain business improvements and investments made strategically can reduce your taxable gain
• Retirement plan contributions and charitable giving can offset sale proceeds
• Working with your tax advisor and financial planner together prevents costly coordination gaps

Starting early means you're not scrambling to make decisions under pressure when a buyer appears.

Why Two Years Matters

Selling a business triggers capital gains tax, and depending on how long you've owned it and your income level, that could mean federal rates of 15% or 20%, plus state taxes. For a $2 million sale, that's potentially $400,000+ in taxes.

But here's the thing: many tax strategies require time to execute. You can't implement them in the final month before closing.

Income timing is one example. If you expect a large sale in 2026, you might accelerate income into 2024 or 2025 to spread your total taxable income across multiple years and potentially stay in a lower tax bracket. Or you might defer certain income to years after the sale. Either way, this needs planning-not last-minute scrambling.

Entity structure is another. Some business owners benefit from converting to an S-corporation or restructuring how the business is organized before a sale. These changes need time to settle and show their tax benefit.

The Asset Sale vs. Stock Sale Question

When you sell your business, the buyer will want either your assets or your stock. This choice has enormous tax implications-and it's not always up to you.

In an asset sale, you're selling the individual pieces of your business (equipment, inventory, customer lists, goodwill). You pay capital gains tax on the gain for each asset. Some assets get depreciation recapture, which is taxed at higher rates. This is usually less favorable for you.

In a stock sale, you're selling the company itself as a legal entity. You typically pay capital gains tax on the difference between what you sell it for and what you paid for it. This is often more favorable, but the buyer may resist it because they don't get the same tax benefits.

Two years of planning helps you understand which structure makes sense for your situation and potentially negotiate it into the deal.

Strategies That Take Time

Here are moves that work best when you start early:

Charitable giving can offset some of your sale proceeds. If you donate appreciated stock or business interests to a charitable remainder trust before the sale, you may reduce your taxable gain while creating income for retirement.

Maximizing retirement contributions in the years before the sale lets you reduce your income and shelter some of your wealth from taxes. If you have a Solo 401(k) or SEP-IRA, you may be able to contribute significantly more than you realize.

Cleaning up the business matters too. Removing personal expenses, settling any pending litigation, and resolving customer disputes makes the business more valuable and the sale cleaner. A buyer will pay more for a business with clear financials.

Installment sales are another option. Instead of taking all the proceeds at once, you could structure the deal so the buyer pays you over time. This spreads your taxable gain across multiple years and may lower your overall tax burden.

Working as a Team

Here's where many business owners stumble: they work with a tax advisor and a financial planner separately, and the two don't talk.

Your tax advisor might recommend deferring income to reduce your 2026 tax bill. But your financial planner needs to know that because it affects your retirement cash flow projections. Your financial planner might suggest you need $500,000 from the sale to fund retirement. But your tax advisor needs to know that to calculate what sale price you actually need to hit that number after taxes.

When these conversations happen together-ideally two years before the sale-you make better decisions.

Frequently Asked Questions About Selling Your Business

How much of my sale proceeds will go to taxes?

It depends on your tax bracket, how long you've owned the business, and the sale structure. Federal capital gains tax alone could be 15–20% of your gain. Add state taxes, and you could owe 20–30% or more. That's why planning matters-some strategies can reduce this.

Can I avoid capital gains tax when I sell my business?

Not entirely, but you may be able to defer it or reduce it. Installment sales, charitable trusts, and strategic timing can all help. A tax professional can review your specific situation.

What if a buyer appears before I've planned?

Don't panic, but move quickly. Even a few months of planning is better than none. You may still have options-like structuring the deal differently or making last-minute retirement contributions. But you'll have fewer choices than if you'd started earlier.

Should I sell my business or pass it to my kids?

That's a personal and financial decision that depends on your goals, your family situation, and your retirement needs. A financial advisor can help you model both scenarios and see which aligns with your retirement plan.

Do I need both a tax advisor and a financial planner?

For a business sale, yes. They serve different roles. Your tax advisor minimizes what you owe. Your financial planner helps you use the proceeds wisely to fund your retirement. Both conversations matter.

Start Planning Now, Not Later

Selling your business is one of the biggest financial decisions you'll make. The tax piece is complex, but it's also one of the few areas where you have real control. Starting two years out gives you that control.

If you're thinking about retirement in the next few years and your business is a big part of your plan, it's worth having a conversation with both a tax professional and a financial advisor. Together, they can help you understand what you're actually walking away with-and whether it's enough to fund the retirement you want.

The best time to plan was two years ago. The second-best time is today.