Selling a business in Massachusetts can feel like winning the World Series—until the tax bill lands. Between the federal capital-gains rate (20%), the 3.8% net-investment-income tax, and the Commonwealth’s 5% capital-gains tax plus a 4% surtax on income above $1 million, owners can forfeit 32.8% (nearly one-third) of their sale proceeds.

Tax planning should start well before your business sale, but if you’ve already signed a letter of intent (LOI) and are staring down a sizable gain, there are still several practical ways to reduce or defer those taxes—even if you’re already in the bottom of the ninth inning.

Already signed an LOI? Henry’s $7 million tax question

Not long ago, a reader—let’s call him “Henry”, a Boston business owner—emailed me in a panic:
“I have signed a letter of intent to sell my company. I’m looking at a $7 million capital-gains tax. How can I avoid paying taxes? What do you know about deferred sales trusts? How about opportunity-zone funds?”

By the time an LOI (letter of intent) is inked, most deal terms are effectively locked, provided due diligence doesn’t uncover surprises. You generally can’t:

• Flip an asset sale into a stock sale after the fact.
• Re-allocate more value to goodwill (taxed at capital-gains rates instead of ordinary income).

What can still move? Payment timing and who receives what—all negotiable if it benefits the buyer. That wiggle room keeps several last-minute strategies alive for sellers like Henry.

6 Ways to save on business sale taxes even after you sign the LOI

1. Deferred sales trust: deferring—not dodging—capital gains

A Deferred Sales Trust (DST) is a private-letter-ruling–friendly twist (not explicitly sanctioned) on the installment sale of a business under IRC §453. You sell the company to a trust, the trust sells to the end buyer, and the trust pays you over time.

How a deferred sales trust works

• Payment timing: Because you receive the proceeds in installments, you recognize gains only as payments arrive—potentially keeping annual income below the $1 million threshold that triggers an additional 4% tax in Massachusetts.
• Investment flexibility: While proceeds sit inside the trust, they don’t have to be idle. Funds may be invested in marketable securities or other assets.
• Control restrictions: To withstand IRS scrutiny, you cannot act as trustee or beneficiary of the trust; it must be managed by an unrelated third party.

Pros, cons, and IRS scrutiny

A DST can meaningfully spread tax liability, but it is not specifically named in the Code and requires additional cost and complexity. If simplicity and certainty matter more than maximum deferral, consider a straight installment sale instead.

2. Installment Sale: A Simpler, IRS-Approved Alternative

A classic installment sale is fully sanctioned by §453 and typically less expensive than a DST. In an installment sale, the buyer holds a promissory note and pays the seller over an agreed-upon time.

Sample 10-year payment schedule

Imagine a $20 million sale split into ten equal annual payments. Only one-tenth of the gain ($2 million) shows up on your tax return each year (plus interest), easing the tax bite and smoothing cash flow across a full decade.

Interest-rate rules you can’t ignore

The IRS requires an “adequate interest rate” (typically around 4 percent) that compensates the seller for receiving deferred payments. Interest you receive is taxed as ordinary income—not capital gains—so build that into your projections.

3. Opportunity Zone Funds: great tool, but only until 2026

Rolling gains into a Qualified Opportunity Zone Fund (QOZF) within 180 days of closing defers tax until December 31, 2026. Because that date is fast approaching, a QOZF can still help, but the runway is short, and investment options are fewer than in earlier years.

4. 1031 Exchange for Deal-Related Real Estate

When your sale includes real property (land or buildings, not goodwill or equipment), a 1031 like-kind exchange can indefinitely defer 100% of capital gains and depreciation recapture.

Full vs. partial 1031

• Full exchange: Reinvest the entire real-estate portion into replacement property to defer all tax.
• Partial exchange: If you’d rather not manage more property in retirement, you can swap some of the assets and sell the rest. In this case, the cash you keep is taxed that same year, even while the rest of the transaction is tax-deferred.

5. Section 1202 Exclusion (QSBS) for C-Corporations

If your company is a C-corporation and meets Qualified Small Business Stock (QSBS) requirements, you may exclude up to 100% of the gain under Section 1202. Verify eligibility early; this break disappears if you’ve already converted to an S-corp or LLC.

6. Charitable remainder trusts: philanthropy with a tax perk

A Charitable Remainder Trust (CRT) lets you transfer shares to the trust, claim an immediate charitable deduction, and have the CRT sell the business tax-free. The downside is that the income is no longer the seller’s money – it must be donated to a qualified charity. However, if you were planning to donate anyway, this is a great way to claim an immediate tax deduction.

Planning Ahead Beats “Tax Triage”

Last-minute strategies can soften the shock, but the best outcomes come from multi-year planning. If a sale is on your horizon—even five years out—start exploring structures now to keep more of what you’ve built.