Today, we’re covering the essentials of business transition planning with a focus on tax planning. So, what is a business transition? It’s the process of selling or transferring control of your company to its beneficiaries. To do so successfully and in the most tax-efficient manner possible requires thorough tax planning.
Here are three simple goals to keep in mind throughout the process:
- Minimize your tax liability.
- Maximize your business’s value.
- Ensure a smooth transfer of ownership.
Tax planning for a business transition must begin well before you intend to transition, so the best time to start is now. Let’s get into it.
Tax planning is crucial during a business transition.
Tax planning may not be your first consideration when transitioning your business to a new owner, but it is absolutely critical. Without a solid plan, you could face unexpected tax burdens that eat into your profits or create legal issues.
Whether you’re selling your business, passing it on to family, or executing a merger, the right tax strategy helps you keep more of your money.
These are the five most common types of business transitions.
1. Sell the business.
With this transition, you sell to a new entity, like a competitor or outside investor.
You can also sell to an employee. In fact, there are tax benefits for selling through an employee stock ownership plan, where the employee gradually acquires ownership.
2. Pass your business to a family member.
This option is for family businesses that want to transfer ownership to an heir or other relative. A succession plan is required for a smooth transition.
3. Merge with another business.
A merger involves transferring ownership by combining two companies into a single entity.
4. Appoint new leadership while retaining ownership.
With this transition, you shift your leadership responsibilities to a new management team but maintain ownership of the business.
5. Close and liquidate.
Here, you’ll shut down your business and sell off your assets, pay off debts, and distribute the remaining funds.
Closing your business is often a last resort, but outcomes can be positive. Sometimes, it’s the best decision you can make, giving you a chance to retire or pursue new opportunities.
A step-by-step guide to business transition planning.
Let’s walk one by one through the steps you should take for a smooth transition in which you maximize your tax benefits.
1. Set a timeline and get your finances in order.
Only 20% of family businesses have a documented succession plan in place.¹ A thorough plan, with dates for changes in leadership and legal filings, will save you time in the long run.
Begin by reviewing your financial records to ensure that all data is accurate. You’ll need the correct numbers for business valuation and tax efficiency.
2. Choose the right structure.
Select the transition structure that best suits your situation. This decision won’t be 100% financial. If you plan to pass your business to an heir, do so. Then, you can focus on minimizing the tax impact.
3. Get expert advice. And keep everyone in the loop.
Work with a CPA to ensure compliance with the law and the use of the best tax-saving strategies. Also, keep employees, family members, and stakeholders informed throughout the process. No one wants to be surprised during a transition.
4. Negotiate terms.
Whether you’re selling or transferring ownership, make sure all agreements are clear and legally binding. You’ll want to have done your research and enlisted the help of legal counsel before you get to the negotiating table.
Once you’re there, hammer out the details, like purchase price, payment terms, and the timeframe.
Strategies to reduce taxes in business transition planning.
Capital gains, depreciation recapture, and estate and other taxes can all result in an inflated bill. If you’re unaware of these factors, that may be a sign that your business needs tax planning year-round. With careful planning and a proactive tax strategy, you can retain more of your profits in business transitions and save on tax liability throughout the year.
Use tax breaks for small business stock.
Section 1202 of the Internal Revenue Code exempts capital gains tax incurred from select small business stock from one’s federal tax. The maximum gain that can be excluded is $10 million or 10 times the adjusted basis of the stock, whichever is greater.
To qualify, you must be a C-corp and hold stock for more than five years before it’s disposed of, along with several other factors.²
Reinvest real estate proceeds.
If your business transition involves the sale of investment property, you can defer capital gains tax through a process called a 1031 exchange, which allows you to roll profits of a property sale into another property. It’s tax-free, provided that the properties are roughly of the same value.
Remember, personal property doesn’t qualify. There are also strict time limits, so come prepared.³
Sell pieces over time to defer taxes.
By selling your business over time through a process called installment sales, you defer capital gains and avoid a tax spike.
For an installment sale, you’ll need to decide how to divvy up the pieces of your business. You might, for example, start by selling tangible assets like equipment or intangible assets like patents.
Consider state and local taxes.
Tax rules vary by location. In Texas, there is no state income tax, but local taxes may still apply.
Minimize taxes when passing to a family member.
Estate taxes (the transfer of assets after death) and gift taxes (a transfer made while the giver is alive) can reduce a family business transfer significantly.
Take advantage of annual gift exclusion limits. Similar to the installment sale process, the Internal Revenue Service (IRS) allows you to gift a set amount of shares tax-free each year. As of 2025, the limit is $19,000.⁴
You can also set up a family limited partnership (FLP) or an irrevocable trust. When it comes to deciding between the two, you’ll need wealth management expertise. Our firm partners with wealth management firms to make this decision-making seamless.
Some parts of a business transition require immediate attention.
When the wheels are in motion, they’re tough to slow. Before you start a transition, you should know your transition structure and whether it’s an asset sale, gifting, or other transfer.
Others can wait. But not for long.
Post-sale financial planning, such as investments and retirement, is just as important. My advice is to move on all fronts. Remember, the goals here are a smooth transition and financial security. Waiting helps with neither.
Access a network of tax, estate, and retirement planning professionals.
You can save on taxes with your business transition, but you’ll need an integrated network of experts to get the most out of your investment. Our clients get access to that network. Schedule a discovery call today, and we’ll get started planning your transition.
Talk soon,
Jeremy A. Johnson, CPA
References
- CIBC. Your Guide to Business Transition Planning. 2019. Available from: https://cooperativesfirst.com/wp-content/uploads/2017/10/guide-bus-transition-planning-en.pdf
- Cornell Law School. 26 U.S. Code § 1202 – Exclusion of gain from sale of qualified small business stock. Legal Information Institute. Available from: https://www.law.cornell.edu/uscode/text/26/1202
- Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031. August 2008. Available from: https://www.irs.gov/pub/irs-news/fs-08-18.pdf
- Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2025. October 2024. Available from: https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2025.