The Year Before You Sell: A Tax-Planning Checklist for Business Owners

The letter of intent lands, and suddenly the clock is moving. Most of the tax-planning moves that could save you six or seven figures require twelve months of runway, not twelve days. If you are anywhere in the pre-exit window, here is where to focus.

Get the Structure Right Before You Go to Market

The single most expensive mistake owners make is waiting until the purchase agreement is drafted to ask whether the entity is set up correctly. Buyers of C-corps typically want a stock sale; buyers of pass-through businesses often push for an asset deal, which triggers ordinary income on depreciation recapture and shifts more gain into higher-rate buckets. Your advisor and M&A attorney need to model both structures before you open data rooms.

If your C-corp qualifies under Section 1202 (Qualified Small Business Stock), the first $10 million of gain, or ten times your basis, can be completely excluded from federal tax, provided you have held the shares for more than five years and the company met the original issuance and active-business tests. That exclusion does not survive a last-minute entity conversion, so confirm eligibility early.

Also run the depreciation recapture numbers. Section 1245 recapture on equipment and Section 1250 recapture on real property are taxed as ordinary income, not capital gains. Knowing that exposure ahead of time lets you model whether accelerating or deferring additional depreciation in the final year changes your outcome.

Spread the Pain: Installment Sales, CRTs, and Charitable Bunching

A lump-sum close in a single tax year can push millions of dollars into the 20% capital-gains bracket and trigger the 3.8% net investment income tax on top. Two legitimate structures can change that math.

An installment sale spreads principal payments, and the taxable gain, across multiple years. If your marginal rate is likely to drop after the sale (because your W-2 income disappears), deferring recognition has real value. The trade-off is counterparty risk: you are now an unsecured creditor of the buyer, so structure matters.

A Charitable Remainder Trust (CRT) is worth modeling if you have charitable intent and a low-basis position. You contribute appreciated stock or business interest to the CRT before the sale, the trust sells without immediate capital-gains recognition, and you receive an income stream for a term of years while taking a partial charitable deduction today. A Donor-Advised Fund (DAF) is a simpler tool for charitable bunching: contribute two to five years of expected charitable gifts in the closing year, take the full itemized deduction against peak income, and grant out from the DAF on your normal schedule.

What to Do This Week

Pull three documents: your current cap table or entity operating agreement, the most recent depreciation schedule, and your latest personal tax return. Share them with your CPA and financial planner, and ask specifically whether your entity qualifies for Section 1202 and what your all-in effective rate looks like under a stock sale versus an asset sale. If the answers require more than a few days to produce, that is itself useful information about how much runway you actually need.

The exit will happen once. The tax planning needs to start now.

The information provided is for educational purposes only and does not constitute investment, legal, or tax advice. Consult with qualified professionals for guidance specific to your situation.