As owners of childcare centers, preschools, and daycares prepare to sell their businesses, understanding the tax consequences is essential to maximizing your net proceeds. At Gateway School Sales, we specialize in guiding childcare and early education owners through mergers, acquisitions, and successful exits. This article, created for our newsletter subscribers and website visitors, offers a clear overview of determining your business's federal income tax classification and the key tax differences between asset sales and stock (or ownership interest) sales.   With our extensive experience in childcare transactions—from small family-owned centers to multi-site operations—we stress the importance of early tax planning. Tax rules can change (noting recent provisions in the One Big Beautiful Bill Act of 2025 affecting certain incentives), so this is based on current 2025 federal guidelines from sources like the IRS. Always work with qualified tax advisors for advice tailored to your situation.  

Step 1: Determine Your Business's Federal Income Tax Classification

  The first step in planning your childcare center sale is confirming how the IRS taxes your entity. Many owners think of their business as "taxed as an LLC," but federal taxation follows specific IRS elections, not just state formation. Review last year's federal tax returns (with your CPA's help) to identify the form filed:  

• Form 1120-S → S corporation (pass-through: income flows to owners, no corporate-level tax).
• Form 1120 → C corporation (21% flat corporate tax in 2025, with potential double taxation on sales).
• Form 1065 → Partnership taxation (another pass-through structure).
• No separate return (e.g., single-member LLC on Schedule C of Form 1040) → Disregarded entity (all income/expenses reported personally).

  This classification drives how sale proceeds are taxed—from favorable capital gains to potential double taxation. For example, a preschool owner who discovers S corp status can avoid C corp pitfalls and focus on allocating gains to lower-taxed categories like goodwill. At Gateway School Sales, we often start with this review to spot issues early and keep negotiations smooth.  

Step 2: Asset Sales vs. Stock (Ownership Interest) Sales in Childcare Transactions

  In childcare sales, the structure matters hugely. From our experience at Gateway School Sales, asset sales dominate—making up over 95% of deals for centers under $25 million. Buyers (often larger operators or private equity groups) prefer them strongly, so expect this unless your setup is unusual.   Why buyers love asset sales:  

• They purchase specific assets (furniture, curriculum materials, vehicles, leasehold improvements) while leaving liabilities behind.
• This provides a "step-up" in basis to the purchase price, allowing faster depreciation and deductions—crucial for buyers expanding in a high-cost industry.
• Example: Paying $5 million for assets with a $1 million basis lets the buyer deduct the $4 million difference quickly, lowering future taxes and supporting a stronger offer.

  Stock sales are rarer in childcare because buyers inherit the full entity history, including risks like past licensing issues or undisclosed claims. Stock sales treat proceeds as capital gains (up to 20% + 3.8% NIIT if held >1 year), avoiding ordinary income rates common in asset sales. In childcare, contracts (parent enrollments, vendor agreements) often transfer easily, favoring asset sales. But if real estate is involved or re-assigning hundreds of family contracts is tough, a stock sale might be negotiable. We advise caution on converting to C corp for Qualified Small Business Stock (QSBS) benefits under Section 1202—the One Big Beautiful Bill Act raised exclusions to $15 million for stock issued after July 4, 2025 (with tiered options). Most childcare deals stick with asset structured transactions.  

Tax Rules by Entity Type in Childcare Sales

  C Corporations, S Corps, Partnerships, and Disregarded Entities follow general rules, but childcare specifics (depreciable playground equipment, curriculum as intangibles, low-basis furniture/toys) amplify differences.  

• C Corporations: Risk double taxation in asset sales (21% corporate + up to 23.8% on distributions). Stock sales avoid the corporate layer. Explore QSBS or personal goodwill allocation (tied to your relationships with families/staff).
• S Corporations: Pass-through, so stock sales often yield capital gains. Asset sales mix ordinary income (recapture on equipment) and capital gains (goodwill). Section 338(h)(10) elections can help buyers while you negotiate price gross-ups.
• Partnerships/LLCs & Disregarded Entities: Look-through treatment; debt relief counts as proceeds. Sales of interests in disregarded entities are treated as asset sales.

 

Mastering Purchase Price Allocation (Section 1060) – Critical for Childcare Sellers

  In asset sales, allocate the price across IRS classes (cash, receivables, inventory, tangibles, intangibles, goodwill). Buyers want ordinary assets for quick deductions; sellers want capital (like goodwill from your center's reputation and enrollment waitlists). Negotiate this early—before the Letter of Intent if possible. In one Gateway childcare deal, shifting $1.5 million to personal goodwill saved the seller over $250,000 by avoiding ordinary rates.  

Final Thoughts: Plan Ahead with Gateway School Sales

  Selling your childcare center, preschool, or daycare is a major life event—don't let taxes erode your hard-earned value. Proper entity classification, realistic structure expectations, and smart allocations help you keep more. At Gateway School Sales, we've closed hundreds of childcare transactions with a focus on tax-efficient outcomes. This is for general educational information—consult qualified tax and legal professionals for your specific case. Ready for a confidential valuation or exit strategy review tailored to childcare owners?   Contact Gateway School Sales today at (972) 267-9003—let's make your sale a success!