Selling your business? Consider these two strategies to defer or reduce your taxes | Expert Opinion

You’ve built up your business over years. Now it’s time to sell. You’ve found a buyer. You’ve negotiated a good price. You close the deal.

And then comes the hard part: paying taxes on your gain.

It could be a big number. But there are a number of ways to potentially defer — or even reduce — this cost.

Here are two strategies that have grown in popularity.

Using this approach, you don’t take the money up front from the buyer. Instead, a third-party assignment company assumes the buyer’s obligation to make future payments to you.

In many structured installment sales, that obligation is funded by an annuity.

An annuity is an investment vehicle that makes a fixed payment to you over a number of years — even your entire lifetime — in exchange for a lump-sum payment up front, which would be made directly by the buyer of your company. These are usually sold by insurance companies or other large financial services firms.

People like annuities because they protect their principal and offer longer-term financial security. Because many fixed annuities offer a guaranteed payment that covers your expenses, they can also potentially minimize the risk of you outliving your savings.

A structured installment sale defers the capital gains tax on the sale of your company into the future because you only owe the tax in the year when you receive your annuity payment. Interest earned on the annuity is taxed at your ordinary rate as you receive the payment. If your total income declines in the future, this tax could decrease.

“A lot of owners have put everything they had into building the business,” said Wade Martin, a financial adviser with RBC Wealth Management in Princeton. “They don’t have a pension, they haven’t focused on their own financial planning, and they don’t want to take stock market risk. For someone like that, a fixed monthly payment can let them sleep at night.”

There are downsides to annuities.

You lose control over your investment decisions and forego potentially higher gains if you had invested the money on your own. Each installment payment may include a return of basis (part of the money originally put in), capital gain taxed at capital gains rates, and an interest component taxed as ordinary income. Depending on your circumstances, that interest income — or the tax treatment of any remaining annuity value inherited by your beneficiaries — could result in a higher overall tax bill than taking the proceeds up front. You’ll incur fees and you’d likely be susceptible to surrender charges if you withdraw your money early.

“You could theoretically invest the money elsewhere and earn a better return than the annuity’s guaranteed rate,” said Bejan Shirvani, head of structured settlements at MetLife. “However, a good annuity can offer guaranteed payments and professional management.”

Dianne Stewart sold her New Jersey-based auto repair business, Kingston Garage, in 2024. At first she was dubious about a structured installment sale. But then she saw the benefits.

“I asked myself: Do you really need all the cash up front? What are you going to do with it?” she said. “I soon realized that it would be stupid to sell the business outright and lose about 30% to taxes, so for me it’s like a tax-deferred pension.”

But this arrangement may not be for everyone, Stewart acknowledges.

“If you need the money to buy another business or make another investment, it may not fit,” she said. “But if you’re retiring, I think it’s geared toward people who want income instead of one big check, and who want to spread out their tax bill over a longer period of time.”

Setting up donor-advised funds with a wealth adviser allows you to make charitable contributions each year, and then take a tax deduction (subject to some limitations) without actually giving the money away immediately. The fund grows tax-free and you can decide in the future where you want the savings to go. It’s a great way to take advantage of the charitable deduction without committing to a specific charity.

DAFs can also be used to reduce your taxes when you sell your business. The trick here is to make sure your DAF owns a minority shareholder interest in your company before the sale. That way when you sell the company, cash goes to the DAF based on its ownership percentage without generally incurring capital gains taxes because it is a charitable organization.

“A donor-advised fund gives you an immediate tax deduction, tax-free growth inside the account, and the flexibility to decide later which charities will ultimately receive the money,” said Jesse Wideman, a financial adviser with Zenith Wealth Partners in Philadelphia. “Many of my clients have unusually high-income years, often because they’re selling a business. A donor-advised fund lets them capture the charitable deduction in that high-tax year while distributing the money to charities over many years.”

If a business owner is charitably inclined a DAF should be seriously considered, Wideman says, but it’s also important to make sure it’s part of your overall financial plan.

Martin noted that any of these approaches requires thought and long-term planning.

“It’s a holistic viewpoint,” Martin said. “you have to look at estate planning, income taxes, risk tolerance, and what helps someone sleep at night. It’s important to bring in your accountant, attorney, and financial adviser together before making a decision.”