How EP Wealth Advisors Guides Business Sale Tax Planning

Which taxes does selling a business actually trigger?

In an asset purchase, selling a business triggers a blend of capital gains tax, ordinary income tax on non-compete agreements and depreciation recapture. Buyer and seller each attach Form 8594 to their tax returns, and the asset-class split on both forms has to match.

Consider Anita, a 62-year-old widowed veterinarian who owns a two-location animal hospital. She sits at her kitchen table looking over a buyer's draft letter of intent offering $3,200,000. The deal includes $800,000 as a three-year earnout and features a purchase price allocation schedule attached on the final page.

Equipment gain up to prior depreciation is recaptured as ordinary income, while goodwill generally qualifies for long-term capital gain treatment. Earnout dollars are taxed as payments arrive under installment sale rules, meaning closing year and each subsequent year carry their own tax bill. For owners whose business value dwarfs other assets, such as Anita with $3,200,000 in transaction value versus $700,000 in her SEP-IRA, this split determines life after the sale.

When should a seller bring in tax planning?

A seller should bring in business sale tax planning before signing the letter of intent, because the buyer's asset allocation schedule is easiest to alter during early negotiations. Waiting until legal drafting begins locks in tax liabilities that could have been avoided.

Deal structures with earnouts, seller notes or non-competes alter annual income timing and push gains onto the ordinary-income line. Timing also reaches Medicare: the premium you pay at 65 is set by the income on your return from age 63. For 2026, the income surcharge on Part B (IRMAA) can lift the monthly premium from the $202.90 base to $689.90 at the top tier.

Family responsibilities frequently add urgency. Anita's 88-year-old mother recently moved into an assisted living facility costing roughly $7,000 each month. Knowing which year's tax bills eat into her cash flow helps Anita safeguard that continuing care without draining her core portfolio prematurely.

Anita's non-compete: a hypothetical worth $52,500

Hypothetical: Anita's buyer offers $3,200,000 for her animal hospital in an asset purchase, $800,000 of it as a three-year earnout, and its draft puts $400,000 on her non-compete. Non-compete payments are ordinary income. Assume, for illustration, that her ordinary rate runs 15 points above her capital gains rate: $400,000 × 15% = $60,000 of extra tax. The buyer amortizes goodwill and a non-compete over the same 15 years, so moving $350,000 to goodwill costs it little. At a $50,000 non-compete, the extra tax is $7,500, a saving of $52,500 ($60,000 − $7,500). That covers 7.5 months of her mother's $7,000-a-month care.

Notice in the table below how quickly the tax bill climbs as the non-compete allocation increases, alongside the direct impact on her family care budget.

Decision rule: In an asset sale, if the buyer's draft puts more on the non-compete than your promise not to compete is really worth, ask before signing the letter of intent to move the excess to goodwill. Multiply each $100,000 you shift by the difference between your ordinary and capital gains rates; at Anita's assumed 15 points, that is $15,000 saved. Anita requests $50,000 for the non-compete based on a supportable appraisal, leaving the balance in goodwill. Common mistake: signing the letter of intent with the allocation schedule untouched costs Anita $52,500 more than an adjusted figure.

What EP Wealth Advisors hands you before closing

Before you execute the transaction, our team translates legal terms into dollar-for-dollar projections. Honest limitation: tax planning cannot increase the gross purchase price or guarantee that earnout targets are hit. Once definitive agreements are signed, the allocation is largely fixed, leaving only cash distribution timing and quarterly tax payment schedules to manage.

Clients receive a concrete set of planning materials that clarify after-tax cash flows for both current lifestyle and family legacy needs:

• A written memo evaluating the buyer's allocation schedule, outlining exactly what each line item costs you under your assumed individual tax brackets.
• A multi-year tax projection mapping closing proceeds and each expected earnout payment, including anticipated Medicare premium surcharges triggered two years down the road.
• A quarterly estimated tax calendar so your tax obligations are settled predictably without surprise year-end penalties from the IRS.
• A coordinated distribution plan specifying which accounts support family commitments, such as funding eldercare from after-tax closing proceeds before tapping qualified accounts.

How EP Wealth Advisors works through a sale, step by step

Our process guides business owners systematically from initial offer review to post-closing verification. We coordinate closely with your legal and accounting professionals throughout each phase.

• Step 1: You provide the draft letter of intent, prior three business tax filings, depreciation records and investment statements. EP Wealth Advisors maps out gain classifications across all proposed asset classes.
• Step 2: Our team calculates net after-tax proceeds across three distinct scenarios: the initial buyer draft, a modified allocation schedule and an adjusted earnout timeline.
• Step 3: EP Wealth Advisors coordinates directly with your CPA and transactional attorney to refine deal terms. Formal tax filings and contract drafting remain with your CPA and attorney.
• Step 4: After closing, we verify that both parties report matching Form 8594 figures, adjust quarterly tax estimates and review projections as earnout installments clear.

How do I start business sale tax planning with EP Wealth Advisors?

You can initiate business sale tax planning by completing the secure request form on epwealthadvis.com, as our firm does not publish an inbound phone number. Meetings take place by video conference or phone, so owners in any state can work with us.

To maximize value, submit the prospective buyer's draft letter of intent prior to execution, as the purchase allocation schedule requires attention before terms become binding. EP Wealth Advisors serves individuals and families with investable assets of $500,000 or more. Our advisory fees are set out in a written document you receive before any work begins.

Investing sale proceeds involves risk, including loss of principal. We encourage you to review our dedicated guidance on investing sale proceeds to plan your next chapter.