The tax work for a business sale is best done before the letter of intent, because the letter usually sets the structure, the price and the major terms. After it is signed, the buyer has a framework to hold you to, and changing the structure costs leverage. The items worth settling first are whether the deal is an asset or equity sale, how the price is allocated, whether your entity type helps or hurts, when the sale lands, and how much is paid up front.
Why does the letter of intent matter so much for taxes?
A letter of intent is usually non-binding on price, but it describes the deal. Asset sale or stock sale. Cash at close, a note, an earnout or rollover equity. A working capital target. Once those are in writing, the buyer's lawyers and accountants build the purchase agreement around them. Reopening the structure late in the process is possible, but it usually costs something, often in price.
Founders negotiate the headline price hard. The structure is often worth as much, and gets far less attention.
Asset sale or stock sale: why do buyers and sellers disagree?
Buyers usually prefer to buy assets. They get a fresh tax basis in what they buy and can depreciate or amortize much of the price, and they leave old liabilities behind. Sellers usually prefer to sell stock or membership interests, because the gain is more likely to be long-term capital gain.
In an asset sale, the price is split across the assets sold, and each piece is taxed by its own rules. Gain on equipment can be recaptured as ordinary income to the extent of past depreciation. Inventory and receivables produce ordinary income. Goodwill held for more than a year generally produces capital gain. Buyer and seller report the same allocation on IRS Form 8594, so it is negotiated, not chosen alone.
Does your entity type change the answer?
Very much. In a C corporation, an asset sale can be taxed twice: once at the corporate level and again when proceeds are distributed. A stock sale avoids that. In an S corporation or LLC taxed as a partnership, an asset sale is generally taxed once, through to the owners, though an S corporation that converted from a C corporation may face a built-in gains tax.
C corporation stock may also qualify for the qualified small business stock (QSBS) exclusion under section 1202, which can exclude a large part of the gain for stock held long enough. The July 2025 federal tax law changed the rules for stock acquired after July 4, 2025. Half of the gain is excluded after three years, 75% after four and 100% after five. The cap on excluded gain per company rose from $10 million to $15 million, or 10 times basis if greater. The company's gross assets can now be up to $75 million when the stock is issued, up from $50 million. The dollar amounts are indexed after 2026 (Internal Revenue Code section 1202, as amended by Public Law 119-21, July 2025). Entity changes made close to a sale rarely help, which is why this is a years-ahead conversation.
When should the sale close?
Timing changes the tax year the gain falls into. Closing in January rather than December moves the gain a year later, and that can matter if this year already has unusual income, or if a large charitable gift or other planning is meant to land in the same year as the sale. Closing dates are negotiable more often than owners assume.
Federal long-term capital gains are taxed at 0%, 15% or 20%, plus the 3.8% net investment income tax for many sellers, though gain from a business you actively run can be outside that tax. Utah taxes capital gains at its flat individual rate, 4.45% for 2026, with no separate capital gains rate. Gain on a business sale reaches Utah through federal adjusted gross income, so it is taxed like other income (Utah Code sections 59-10-103 and 59-10-104, current as of October 2026).
Cash at close, a note, or an earnout?
- Seller financing. If part of the price is paid over time on a note, the installment method can spread the gain across the years you are paid. It also means you carry the credit risk of the buyer. If the buyer is your own team, see our post on selling to insiders on a note.
- Earnouts. Payments tied to future performance can be taxed when received, but the rules are detailed, and an earnout can be recharacterized as pay if you keep working for the buyer.
- Rollover equity. Taking part of the price as equity in the buyer can sometimes defer tax on that part, depending on how it is structured.
- Consulting and non-compete payments. Payments for your future services or your promise not to compete are ordinary income to you. Buyers sometimes prefer to shift price into these. The split is worth watching.
What else belongs on the list before you sign?
- Gifting before value is fixed. Moving shares to family or to trusts before a deal is agreed can shift future growth out of your estate. Once a price is set, there is less room. For 2026, the federal estate and gift tax exemption is $15 million per person under the 2025 law. Utah has no state estate tax.
- Charitable planning. Giving shares to a charity or donor-advised fund before a binding sale can avoid tax on that portion of the gain. After a binding agreement, the gain may already belong to you.
- The household picture. How much you need from the sale, and what the money has to do, should shape the deal terms, not the other way round.
A hypothetical example
Hypothetical. A Utah owner of an S corporation receives an offer. The buyer proposes an asset sale with most of the price allocated to equipment and a large consulting agreement for the owner. Before signing the letter of intent, the owner's CPA models the same price with more allocated to goodwill and less to consulting. The headline price is unchanged. The after-tax result differs, because goodwill is generally taxed as capital gain while consulting fees are ordinary income. Whether the buyer would agree is a negotiation, but the owner now knows what each version is worth.
We are not brokers and take no part in the transaction, so our fee does not change with whether, when or for how much you sell. If a sale is possible in the next few years, our business and exit planning page explains how we work alongside your attorney and CPA on exactly these questions.
Educational only. Not investment, tax, or legal advice. Every situation is different; the right answer depends on the numbers, and that's what the strategy session is for. Investing involves risk, including possible loss of principal.