Taxes on Selling a Consulting Firm Explained for Founders

Selling a consulting firm can be a major milestone. But beyond negotiating the right price, founders need to consider what portion of sale proceeds will actually end up in their pocket after taxes. Taxes can significantly reduce net proceeds if you are not prepared.

Understanding how taxes work when selling your business helps you plan effectively and avoid surprises at closing. This guide explains what to expect when it comes to taxes on selling a consulting firm, and how to structure your deal to maximize what you keep.

1. Why Taxes Matter

Even a successful transaction can feel disappointing if taxes take a larger share than expected. Taxes on selling a consulting firm can vary widely depending on deal structure, your state of residence, and how the sale is allocated between assets.

Planning ahead ensures that your deal is structured efficiently, giving you the best possible after-tax result.

2. Asset Sale vs. Stock Sale

One of the most important tax considerations is whether your sale is structured as an asset sale or a stock sale.

In an asset sale, you sell the firm’s individual assets, such as client contracts, goodwill, intellectual property, and equipment. Buyers often prefer asset sales because they can pick and choose which assets and liabilities they acquire and receive favorable tax treatment by stepping up the basis of assets.

For sellers, asset sales can be less tax-efficient because the proceeds are taxed based on how the purchase price is allocated. Some parts of the sale (like goodwill) may qualify for capital gains rates, while others (such as equipment or depreciation recapture) are taxed as ordinary income.

In a stock sale, you sell ownership shares or membership interests in the company itself. Sellers typically prefer this structure because most or all of the proceeds qualify for long-term capital gains treatment, which usually results in a lower tax rate. However, buyers may resist stock sales due to potential liabilities they would inherit.

3. Federal Capital Gains Tax Rates

For most founders, the bulk of proceeds from selling a consulting firm will be taxed as long-term capital gains. Federal long-term capital gains tax rates depend on your taxable income and filing status, with current rates (as of 2025) at:

• 0% for low-income taxpayers

• 15% for most taxpayers

• 20% for high-income taxpayers

In addition, many sellers will pay the 3.8% net investment income tax, bringing the effective federal tax rate on capital gains for high earners to 23.8%.

Short-term gains (for assets held less than a year) are taxed at ordinary income rates, which can be as high as 37%. Careful planning to ensure your sale qualifies for long-term treatment can help minimize taxes.

4. State Taxes

In addition to federal taxes, state taxes may apply. Some states, like Florida and Texas, do not impose state income tax on capital gains. Others, like California and New York, have high state income tax rates that apply to gains from selling a business.

When thinking about taxes on selling a consulting firm, consider your state of residence, the locations where your firm operates, and whether moving your residency in advance might produce savings. This kind of tax planning needs to happen well before a sale.

5. Purchase Price Allocation

In an asset sale, how the purchase price is allocated between different asset categories affects the taxes you pay. For example:

• Goodwill and client relationships are generally taxed as long-term capital gains

• Furniture and equipment may trigger ordinary income tax due to depreciation recapture

• Non-compete agreements may also be taxed as ordinary income

The IRS requires buyers and sellers to agree on and report the allocation consistently. Negotiating a favorable allocation can help reduce your overall tax burden.

6. Earn-outs and Installment Payments

Many consulting firm sales include deferred payments, such as earn-outs tied to future performance or installment payments spread over time.

Tax treatment depends on structure:

• Earn-outs are generally taxed as they are received, which can spread tax liability over several years

• Installment sales allow capital gains to be recognized as payments are received, smoothing tax obligations

However, interest income and depreciation recapture may accelerate some tax liability. It’s important to understand how future payments will be taxed and plan accordingly.

7. Employment or Consulting Agreements

If part of your compensation is structured as wages or consulting fees after the sale, that income will be taxed at ordinary income rates and subject to payroll or self-employment taxes.

These amounts will be taxed differently than proceeds from the sale itself and should be accounted for separately when planning for your tax liabilities.

8. Reducing Key Person Risk and Taxes

Buyers may ask you to remain involved for a transition period, sometimes tied to an earn-out. This can affect both deal structure and how proceeds are taxed.

The more your compensation is tied to post-sale services, the more likely some payments will be taxed at higher ordinary income rates. Preparing in advance to reduce key person risk can help you negotiate a structure that maximizes capital gains treatment.

9. Tax Planning Strategies

Early tax planning before you sell can lead to significant savings. Common strategies include:

• Ensuring ownership interests qualify for long-term capital gains treatment

• Timing the sale for a year when your taxable income will be lower

• Using installment sale rules to spread gains across years

• Considering trusts or other structures to reduce or defer taxes

Working with a tax advisor experienced in M&A transactions is essential to evaluate your options and avoid mistakes.

Final Thoughts

Taxes on selling a consulting firm can dramatically affect your net proceeds. From asset versus stock sale structures to purchase price allocation, state taxes, and earn-outs, there are many factors that influence your total tax bill.

The good news is that careful preparation and tax planning can help reduce your liability and improve your financial outcome. At Merge, we help consulting firm owners not only sell their business but understand the financial implications, including taxes.

If you are thinking about selling your consulting firm or simply want to understand your options, we’re happy to offer guidance tailored to your situation.