IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities.  Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog article has been provided by Christopher Ashton of Wilson Hand (https://wilsonhand.com/):

Selling a Business or Investment Asset: An Educational Guide to Reducing Capital Gains Tax

Selling a business, real estate, or an appreciated investment is a major financial event. It often represents the result of years of work, careful planning, and disciplined decision-making. But when the sale finally occurs, many owners discover something they weren’t fully prepared for: the tax bill. Federal capital gains tax—often around 20%—plus state income tax can quickly become the largest expenses involved in the entire transaction.

This usually comes as a surprise, not because owners aren’t aware that taxes exist, but because they don’t realize how much can be done to reduce the burden before the sale happens. The tax code includes a number of legal, long-standing provisions designed to help taxpayers manage income, preserve capital, and encourage economic activity. These tools are not loopholes or aggressive maneuvers—they are established parts of federal law. When used correctly, they can significantly reduce the taxable impact of selling an appreciated asset.

This guide aims to explain these ideas in a simple, educational way so that business owners and investors can make informed decisions as they prepare for a sale.

Why Taxes Spike When You Sell an Asset

Most people are taxed on income as they earn it throughout the year. But when you sell a business or real estate, all of the appreciation that may have built up over years is recognized at once — on the closing date.

This “compression” of income creates three challenges:

1. Higher tax brackets: Large gains can push a seller into elevated federal and state tax brackets.
2. Loss of flexibility: Once the transaction closes, options for tax reduction become limited.
3. Cash flow issues: Tax obligations may be due before the seller has reinvested or repositioned their wealth.

Because of this, proper planning is not just helpful—it is often essential.

How the Tax Code Helps Sellers Reduce the Burden

Several sections of the tax code allow sellers to legally reduce or manage the tax impact associated with a large gain. These rules were created to stimulate investment, encourage economic growth, and provide individuals with tools to manage their finances responsibly.

Below are three areas that frequently play a role in tax planning for major sales. Each one serves a different purpose, and all must be implemented correctly to comply with IRS rules. The goal here is not to provide technical instruction, but to explain the concepts in a clear, understandable way.

Managing Timing with Installment Reporting

One of the simplest tools available is the ability to spread income over time. When a seller receives all proceeds upfront, the entire gain is taxed immediately. But if payments are received over a number of years, the gain may be reported gradually. This approach better matches taxation with the actual flow of money.

Many sellers choose an installment structure to:

• Reduce the concentration of income in a single tax year
• Avoid being pushed into the highest tax brackets
• Improve liquidity and long-term cash flow
• Create more stability during retirement or business transition

Installment reporting does not erase tax, but timing alone can have a substantial financial impact.

Using Bonus Depreciation to Create Large Deductions

Another element of tax planning involves using deductions to offset income. Bonus depreciation allows taxpayers to take a large deduction for certain types of qualifying property in the year it is placed in service. This can include equipment, technology, improvements, and other business-related assets.

For someone selling a business or investment property, new qualifying investments may generate immediate deductions that help reduce the taxable gain in the same year. Bonus depreciation was designed to encourage reinvestment and business growth, but it can also be an effective planning tool when used responsibly.

The key is ensuring:

• The investment qualifies under IRS rules
• The timing aligns with the seller’s financial goals
• The structure is reviewed by legal and tax professionals

When done correctly, bonus depreciation can soften the tax impact of a large sale by creating meaningful deductions at the right time.

Using Trust-Based Planning with IRC 678

Trusts are another tool used in tax and estate planning. They help with asset protection, generational planning, and the organization of wealth. One particular rule—IRC 678—allows certain trusts to be drafted so that the beneficiary, rather than the trust, is treated as the taxpayer.

In simple terms, this means:

• Income or deductions inside the trust are reported on the beneficiary’s personal tax return
• The trust does not pay tax separately
• The beneficiary’s own tax brackets and planning strategies apply

This structure can make planning more flexible and more efficient. Trusts reach high tax brackets quickly, so shifting tax responsibility to an individual—when appropriate—can create better outcomes. IRC 678 does not create special tax benefits by itself; it simply determines who is responsible for reporting the tax items. But this distinction matters when preparing for a large sale, because it affects how income, gain, and deductions flow through the overall financial plan.

Why Early Planning Makes the Biggest Difference

The most common mistake sellers make is waiting too long to plan. Many strategies must be put in place before the letter of intent is signed, before negotiations are finalized, and well before the closing date. Once the sale is complete, opportunities shrink dramatically.

Early planning helps sellers understand:

• The size of their projected tax liability
• How much of the gain could be mitigated with planning
• The cost, timing, and complexity of different strategies
• Whether trusts, corporate structures, or reinvestment options should be used

When conversations begin early, planning becomes smooth, compliant, and predictable rather than rushed or stressful.

Compliance, Documentation, and IRS Readiness

Any time a seller uses advanced planning tools, documentation is critical. The IRS expects clarity, transparency, and strong support for any strategy that affects taxable income. A well-designed plan is one that is:

• Based on established sections of the tax code
• Reviewed by independent legal and tax professionals
• Fully documented with clear intent and purpose
• Easy for the seller to understand
• Aligned with both federal and state requirements

Good planning is not about being aggressive—it is about being thorough, accurate, and prepared.

Our firm stands behind every strategy we implement. We also provide full IRS audit defense at no additional charge. This ensures that clients have professional support not only before the sale, but also afterward should questions ever arise.

Final Thoughts

Selling a business or investment asset should be a moment of achievement, not anxiety. With proper planning, sellers can significantly reduce tax exposure, preserve more of their wealth, and enter the next chapter of life with confidence.

There is no obligation—only clear, honest analysis from professionals who understand that your wealth is more than numbers on a balance sheet. It represents years of effort, sacrifice, and discipline. You deserve to keep as much of it as the law allows.

If you have questions relating to the content of this article or tax mitigation strategies associated with selling or buying a business, Christopher Ashton would welcome the opportunity to answer them.  Mr. Ashton can be reached at (509) 670-1517 and Christopher@hancockmartin.com.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, real estate, accounting, legal, and financial planning communities on subjects relevant to the purchase & sale of privately held companies and family-owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.