Taxes When Buying or Selling a Business

Buying or selling a business can be one of the most financially significant events in your career. But beyond the valuation and negotiations, the tax implications can dramatically affect how much you keep. Whether you’re an entrepreneur looking to cash out or a buyer eyeing expansion, understanding the tax treatment is essential.

Key Tax Code References & Forms

• IRC §1001 – Gain or loss from the sale of property
• IRC §1022 – Basis of assets received in exchange
• IRC §311 – Recognition of gain or loss in transfers
• IRC §1237 – Allocation of goodwill
• Form 8594 – Asset Acquisition Statement
• Form 4797 – Sale of Business Property
• Schedule D (Form 1040) – Capital Gains and Losses

Asset Sale vs. Stock Sale: Tax Differences

Asset Sale (More common for small businesses):

• Buyer acquires specific assets (equipment, inventory, IP, goodwill)
• Seller reports gains on each asset based on allocation
• Ordinary income treatment on depreciation recapture (IRC §1241)
• Capital gains on goodwill and most intangible assets
• Form 8594 required by both parties

Stock Sale:

• Simpler for seller; buyer acquires company stock
• Entire gain is capital gain to the seller
• No depreciation recapture
• Buyer doesn’t get stepped-up asset basis unless making a 338(h)(10) election (for C Corps/S Corps)

Example: Selling a Tech Startup

Sarah sells her S Corporation for $2.5M. Her asset allocation is:

• Equipment: $150,000 (original cost: $100,000, fully depreciated)
• Inventory: $200,000
• Goodwill: $1.5M
• Remaining items: $650,000

Depreciation Recapture: $100,000 is taxed as ordinary income
Goodwill Gain: $1.5M is long-term capital gain

Step-by-Step Guide: How to Handle the Sale

For Sellers:

1. Determine sale type: Asset or stock
2. Hire a CPA: Structure deal to minimize ordinary income
3. Negotiate Form 8594 allocations: Affects tax liability
4. Report gain on Form 4797 and Schedule D
5. Pay estimated taxes if large gain is expected

For Buyers:

1. Choose structure (LLC, Corp) based on goals
2. Perform due diligence on existing liabilities
3. Allocate purchase price on Form 8594
4. Step-up basis may allow larger future depreciation
5. Consult a CPA to explore IRC §338(h)(10) election (if buying stock)

Conclusion

Tax planning during the buying or selling of a business can significantly impact your net proceeds or long-term deductions. Choosing the right structure, filing the right forms, and timing the transaction correctly are key.

Call to Action

If you’re buying or selling a business, don’t leave money on the table. Speak with a tax expert who understands deal structuring and IRS compliance.

Anshul Goyal, CPA EA FCA is a U.S. Certified Public Accountant, Enrolled Agent, and cross-border tax expert who advises clients on business exits and acquisitions.

Disclaimer

This blog is for informational purposes only. Tax consequences can vary depending on your specific situation. Always consult a licensed professional.

Top 5 FAQs

1. Is it better to do an asset sale or stock sale?
   It depends. Asset sales benefit buyers; stock sales benefit sellers.
2. Do I need to file Form 8594?
   Yes, if you’re involved in an asset sale. Both parties must file.
3. Are all gains from selling a business capital gains?
   No. Some assets (e.g., equipment) may trigger ordinary income.
4. Can I defer tax using an installment sale?
   Yes, if structured properly. Use Form 6252.
5. How does goodwill affect my taxes?
   Goodwill is generally taxed as long-term capital gain for sellers.

About Our CPA

Anshul Goyal, CPA EA FCA, is a licensed U.S. Certified Public Accountant and Enrolled Agent. He specializes in M&A tax strategies, business restructuring, and international taxation.