Exit Tax Planning: How to Keep More When You Sell Your Trade Business

You spent 20 years building a trade contracting business. You finally get an offer that reflects your hard work—say, $2 million. Handshakes all around. Papers signed. Wire transfer pending. Then your tax advisor runs the numbers: $400,000 to $600,000 goes to federal and state taxes.

That is not a hypothetical. Without proper planning, combined federal and state capital gains taxes can consume 25–35% of your sale proceeds—higher in California where capital gains are taxed as ordinary income up to 13.3%. The time to plan for this is before you sign the letter of intent, not after.

How the Sale Gets Taxed

The tax treatment depends primarily on how the deal is structured: asset sale versus stock (or membership interest) sale.

In most small business transactions, buyers prefer asset purchases because they get to "step up" the tax basis of acquired assets and take depreciation deductions going forward. Sellers generally prefer stock sales for simpler capital gains treatment at lower rates. This tension is one of the most important negotiation points in any deal, and it directly affects your after-tax proceeds.

In an asset sale, the purchase price gets allocated across different asset categories—equipment, goodwill, customer lists, non-compete agreements, inventory—and each category may be taxed differently. Some portions may qualify for long-term capital gains rates (currently 0%, 15%, or 20% federally depending on income). Other portions—like non-compete agreements—may be taxed as ordinary income at rates up to 37%.

Six Strategies to Minimize the Tax Bite

1. Installment Sale

Instead of receiving the full purchase price at closing, structure the deal so payments come over two to five years. This spreads the recognized gain across multiple tax years, potentially keeping each year's income in lower brackets. Selling for $2M and spreading it over four years means each year's recognized gain is roughly $500K instead of $2M—a significant difference in marginal tax rates, especially at the federal level and dramatically so in high-tax states.

The downside: you carry counterparty risk (the buyer has to keep paying), and you defer liquidity. But for many sellers, the tax savings more than compensate for the delayed access to capital.

2. Qualified Small Business Stock (Section 1202) Exclusion

If your business is structured as a C-Corporation and meets certain requirements (original issuance of stock, held for 5+ years, active business, under $50M in gross assets at issuance), you may be able to exclude up to $10 million in capital gains under IRC Section 1202. This is rare among trade contractors—most operate as S-Corps or LLCs—but for those who qualify or who have time to restructure before a sale, the savings can be extraordinary.

3. Opportunity Zone Reinvestment

Reinvesting capital gains from the sale into a Qualified Opportunity Zone fund within 180 days of the transaction can defer the tax on your gain until 2026 (or when you sell the OZ investment). While the original tax deferral benefit has been reduced from the program's early years, if you are already planning real estate or business investments, the OZ structure can still provide meaningful tax advantages.

4. Charitable Strategies

For sellers with philanthropic goals, coordinating charitable giving with a business sale magnifies the tax benefit. Donor Advised Funds allow you to contribute appreciated assets (or cash from the sale) and take a deduction in the year of the sale when your income—and therefore the value of the deduction—is highest. Charitable Remainder Trusts can provide ongoing income streams while generating a partial deduction. These strategies work best when planned 12+ months before the transaction.

5. Retirement Plan Maximization

In the year of the sale, maximize every available retirement contribution. If you have a Solo 401(k), you can contribute up to $69,000 (2024 limits, adjusted annually). If you have established a Defined Benefit Plan two or more years before the sale, you may be able to shelter $200,000+ in a single year—at your highest marginal rate. This is one of the most powerful tools available to business owners in the year of a liquidity event.

6. State Tax Planning

State tax treatment of business sale proceeds varies dramatically. California taxes capital gains as ordinary income—up to 13.3%. Florida, Texas, Nevada, Wyoming, and several others have no state income tax at all. On a $2M gain, the California state tax alone could be $200,000+ that would not exist in a no-tax state.

Relocating before a sale is legal—but it must be genuine and well-documented. The states that lose revenue (especially California through its Franchise Tax Board) aggressively audit departing residents. This strategy requires early planning and clean execution, ideally 18+ months before the sale.

Earnouts and Rollover Equity

Many PE deals include components beyond the upfront purchase price:

• Earnouts are additional payments tied to the business hitting revenue or EBITDA targets post-sale. These are typically taxed as ordinary income when received—not capital gains. That tax treatment difference can be significant, and it should factor into your negotiation of how much of the deal is structured as earnout versus upfront payment.
• Rollover equity means you retain 10–25% ownership in the combined platform entity. The tax on the rolled portion is deferred—you do not pay it until the next liquidity event (often when the PE firm sells the platform 3–5 years later). Rollover can be a good deal if the platform grows, but it is not a liquidity event on that portion.

Start Planning 2–3 Years Before the Sale

Most of these strategies require setup time. Retirement plans need to be established and funded for at least one year before the sale to be most effective. Entity restructuring (if QSBS is in play) needs years of lead time. Installment sale terms need to be negotiated into the deal structure from the beginning. State residency changes need to be genuine and well-documented.

Build exit tax planning into your 3-year exit countdown starting in Year 1. Work with someone who understands both the tax code and the M&A process for trade contractors—because the intersection of those two areas is where the real money is saved.

The sale price is what they offer. The after-tax proceeds are what you keep. With proper planning, the gap between those two numbers can shrink by six figures.

The Bottom Line

The biggest financial event of most contractor-owners' lives should not also be the most expensive tax event. With 2–3 years of planning, the right entity structure, and proper deal negotiation, the difference between naive and optimized tax treatment can easily exceed $100,000—often much more. Do not let taxes be the surprise that diminishes the reward for everything you have built.