As accounting and tax professionals, you’ve likely encountered business sales a time or two. Many of the fundamental tax considerations are the same for practice sales. However, succession planning for a tax practice introduces additional complexity due to entity structure, seasonal revenue, and the need to balance buyer and seller tax outcomes.
In the fourth blog in this series, we talked about different legal and financial fundamentals, including triggering events, potential sale structures, and common valuation models. In this blog, we’ll explore important tax considerations and how to facilitate a smooth knowledge transfer.
There are two main primary structures used to transfer ownership of a tax practice: asset and stock sales. Let’s explore the basics of each method and the potential tax implications.
An asset sale involves purchasing specific assets, such as accounts receivable, office equipment, client lists, and other intellectual property. Accounts payable can be included in the sale, but most long-term debt is usually excluded.
Asset sales can trigger two levels of taxation for sellers:
Because depreciation recapture is taxed as ordinary income, asset sales often produce less favorable after-tax results for sellers. Buyers, however, typically prefer asset acquisitions because they receive a stepped-up basis in acquired assets, allowing for future depreciation or amortization deductions and limiting exposure to prior liabilities.
In a stock sale, the buyer purchases your ownership share, acquiring all assets and liabilities. This method is often operationally simpler, as everything in the practice is transferred to the buyer.
Stock sales result in long-term capital gains tax treatment, which can unlock more favorable rates ranging from 0% to 20%, making it the preferred structure for sellers. Buyers may accept stock sales when liability risk is low or when pricing concessions offset the lack of a basis step-up.
Pairing a stock sale with an installment sale has the potential to eliminate all long-term capital gains taxes. For the 2026 tax year, the long-term capital gains tax rate is 0% if taxable income is under $48,350 for single filers or $96,700 for joint filers. Additionally, if a seller dies while holding the installment note, any remaining unrealized gain generally receives a basis step-up, potentially eliminating deferred capital gains for heirs.
Tax practices with net operating losses (NOLs) need to pay close attention to the structure of the sale. Asset sales give sellers the ability to use NOLs to offset gains, while stock sales pass accumulated NOLs to the buyer. However, buyers may have limited NOLs available for use under IRC § 382. This limitation is calculated by taking the value of the practice multiplied by a federal rate.
When a sale or entity conversion is anticipated, practitioners should consider planning strategies to maximize NOL utilization prior to closing, such as accelerating income or deferring deductions, particularly when post-transaction limitations are expected to apply.
Basis in the tax practice directly impacts the gain on sale. Basis is everything an owner has contributed, withdrawn, and earned from the time of the initial investment. For example, if a practice sells for $100,000 and the owner has a basis of $25,000, $75,000 would be taxable.
It’s important to note that distributions must follow a specific hierarchy, which can reduce basis and impact taxes. For example, an S corporation with accumulated earnings and profit (AE&P) would use the following order:
Understanding these ordering rules is particularly important in succession planning, as improper distributions prior to sale can unintentionally increase taxable gain.
Built-in gains tax (BIG tax) is applicable when an S corporation converts from a C corporation and sells appreciated assets within a five-year period. For example, if a practice owner converts from a C corporation to an S corporation and sells the business through an asset sale three years later, a 21% corporate tax applies to asset gains. It’s important to note that BIG tax is applicable even if an installment sale method is used. One of the best ways to minimize BIG tax is to satisfy the five-year holding period.
The net investment income Tax (NIIT) is a 3.8% tax imposed on passive income when modified adjusted gross income (MAGI) is over $200,000 for single filers and $250,000 for joint filers. NIIT is generally not applicable in businesses where the taxpayer materially or actively participates. However, C corporation practice sales are generally subject to NIIT regardless of participation status.
Managing MAGI levels through installment sales, retirement timing, or income-smoothing strategies can help mitigate NIIT exposure.
Two components often found in a practice sale are goodwill and non-compete agreements. Goodwill is taxable at long-term capital gains tax rates, while non-compete agreements are taxed as ordinary income.
Sellers often prefer to allocate more of the purchase price to goodwill rather than non-compete agreements to receive favorable long-term rates. Buyers are generally indifferent, as both goodwill and non-compete agreements are amortizable. When sold under an installment arrangement, goodwill retains capital-gain character, while interest income is taxed separately at ordinary rates.
A tax-free reorganization gives practice owners the ability to sell their company by exchanging stock in their company for stock in the buyer’s company. This strategy can defer taxes until the acquired shares are sold. Type A reorganizations are direct mergers between two companies, while Type B reorganizations involve stock-to-stock transactions. The transaction must have a business purpose and the seller must maintain a continued equity stake in the acquiring company. If these conditions are met, the taxes related to the sale can be deferred.
Selling a practice to a family member or employee at a discount can draw in tax implications. Sale prices less than the fair market value are considered partial gifts, which count towards the annual gift tax exemption and the lifetime exemption. For example, if an owner sells their practice for $100,000 under the fair market value, $19,000 will go towards the annual exclusion and the remaining $81,000 will reduce their lifetime exemption.
Considering all tax implications of practice sales adds transparency throughout the process. Once the details of the sale are finalized, it’s important to ensure proper knowledge transfer. Create detailed listings of standard operating procedures, credential registries, and client history documentation. In many situations, practice owners will stay on a part-time or as-needed basis to help facilitate a smooth transition. Finding the right succession method, planning strategies, and knowledge transfer workflows can make the transition easier for all involved parties.
This article concludes our succession planning series for tax practices. Earlier articles explored why succession planning matters, identifying a successor, building client confidence during a transition, and preparing a practice for the unexpected.
By Rachel Szeklinski, CPA
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Disclaimer: The information referenced in Tax School’s blog is accurate at the date of publication. You may contact taxschool@illinois.edu if you have more up-to-date, supported information and we will create an addendum.
University of Illinois Tax School is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information in this site is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information. This blog and the information contained herein does not constitute tax client advice.
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