Tax Law ✦ Transactions
Selling the Business? The Structure Decides What You Keep.
The difference between a well-structured sale and a badly structured one is often the largest tax bill of a business owner’s life. Asset versus stock, allocation, installment terms, earnouts, and what to do about the SBA loan all get decided before closing, or they get decided for you. North Star Law Firm structures sales and acquisitions for Colorado businesses as an attorney-CPA practice.
Overview
What gets decided, and when
A business sale is a series of tax decisions that masquerade as deal points: the form of the transaction, the allocation of the price, the timing of payments, the treatment of the seller’s continued involvement, and the fate of the debt on the business. Each has a federal consequence, a Colorado consequence, and a counterparty who wants the opposite. The right time to plan is before the letter of intent, when structure is still open. We model the alternatives, negotiate the tax terms, draft or review the tax provisions of the purchase agreement, and handle the reporting after closing, including the SBA loan payoff that so many Colorado sales now involve.
- Asset versus stock analysis modeled on your numbers
- Purchase price allocation negotiated under § 1060
- Installment sale, earnout, and consulting agreement structuring
- Section 1202 qualified small business stock analysis for C corporation sellers
- SBA 7(a) and EIDL loan consent, payoff, and guarantee planning
- Buyer-side structuring: entity, financing, and step-up strategy
- Colorado income and sales tax on the transaction
- Post-closing reporting: Form 8594, final returns, and estimates
Structure
How the same price produces different tax bills
| Structure | Seller’s tax | Buyer’s tax | When it fits |
|---|---|---|---|
| Stock or membership interest sale | Capital gain on the whole price (one layer); § 1202 exclusion possible for QSBS | No basis step-up in the assets | C corporation sellers; buyers who value contracts and licenses staying in place |
| Asset sale | Mix of ordinary income (recapture, inventory, receivables) and capital gain (goodwill); two layers for a C corporation | Stepped-up basis; faster depreciation | Pass-through sellers; most small business deals |
| Installment sale | Gain reported as payments received under § 453; recapture up front | Same as the underlying structure | Seller financing; spreading the gain across years |
| F reorganization before sale | Lets an S corporation sell assets through a new holding structure while the buyer gets a step-up | Step-up without an asset transfer | Deals with private equity or rollover equity |
| Earnout and consulting | Earnout is usually purchase price; consulting and non-compete payments are ordinary income | Deductible as paid for consulting; amortized for non-compete | Bridging valuation gaps; keeping the seller involved |
The Attorney-CPA Difference
The deal model and the deal documents match because the same person made both.
Transaction lawyers negotiate terms; accountants compute the result. When they work separately, the purchase agreement’s allocation schedule and the seller’s tax projection are frequently different documents. We build the model, negotiate from it, and draft the tax provisions to match, so the number you expect at closing is the number that shows up on the return. And because we handle SBA loan defaults for a living, we know how to get a lender’s consent and a lien release without derailing the deal.
- Tax projection built before the letter of intent
- Allocation, installment, and earnout terms negotiated with the model in hand
- SBA consent and payoff handled inside the transaction timeline
- Colorado income and sales tax consequences computed for both sides
- Post-closing reporting done by the same people who structured the deal
Questions & Answers
Business Sale & M&A Tax Structuring questions, answered
Asset sale or stock sale?
Buyers want assets (a stepped-up basis to depreciate); sellers want stock (one layer of capital gain). For an S corporation or LLC the difference is smaller than for a C corporation, and it can be bridged with allocation and price. For a C corporation the difference is the whole negotiation. We model both for your numbers before the letter of intent is signed, because the structure is much harder to change after.
How is the purchase price allocated?
Under I.R.C. § 1060, both sides report the same allocation among seven asset classes on Form 8594, and that allocation decides how much of your gain is ordinary (inventory, receivables, depreciation recapture) and how much is capital (goodwill). The allocation is negotiated, and a seller who leaves it to the buyer’s template gives up real money.
Can I spread the tax with an installment sale?
Often. Seller financing lets you report gain as payments arrive under § 453, subject to recapture being taxed up front and interest charges on large deferred balances. In Colorado the flat state tax follows the federal timing. We also structure earnouts, consulting agreements, and non-competes, each of which is taxed differently to the seller.
I have an SBA loan on the business. What does that do to the sale?
It changes everything about the closing. SBA 7(a) and EIDL loans generally cannot be assumed without lender consent, the SBA’s lien on business assets must be released or paid from proceeds, and a sale that leaves the loan unpaid can trigger the personal guarantee and, in some cases, fraud scrutiny of where the proceeds went. We handle the SBA side of a sale as part of the tax structuring.
What about Colorado taxes on the sale?
The gain is taxed at the flat Colorado rate. The Colorado capital gain subtraction that once covered business assets has been limited since 2022 to farmers selling agricultural land, so for most sellers there is no state-level break beyond the federal timing. Sales tax can apply to tangible assets transferred in an asset sale unless an exemption applies, and home-rule cities have their own rules. The buyer and seller both need the state picture before closing.
Plan the tax before the transaction, not after.
A free consultation with an attorney-CPA who can draft the structure and run the numbers in the same meeting.