Guide
Capital Gains Tax When You Sell a Business
Owners tend to think of the tax on a business sale as one number applied to one gain. It is not. A business sale is taxed as a set of separate transactions across different asset classes, each with its own rate, and the split between them is negotiated in the purchase agreement. That is why two sellers with identical prices can keep very different amounts, and why the tax conversation belongs before the letter of intent rather than at closing.
The sale is not one transaction for tax
In an asset sale the price is allocated across asset classes: cash, receivables, inventory, equipment, real property, intangibles, goodwill and any non-compete or consulting payments. Each class is taxed differently.
Goodwill is generally capital gain, which is the favourable treatment. Inventory is generally ordinary income. Equipment carries depreciation recapture on the amount previously depreciated. A non-compete payment is ordinary income, and a consulting agreement is ordinary income plus self-employment tax.
In a stock sale the picture is simpler: you sell shares and the gain is generally capital, assuming you held them long enough. That simplicity is a large part of why sellers prefer stock sales.
Depreciation recapture is the surprise
Every dollar you depreciated on equipment reduced your taxable income in the year you took it, and that benefit is recaptured when you sell. Recapture is taxed as ordinary income, not at capital gains rates.
Owners who used bonus depreciation or Section 179 to write off equipment quickly are exposed to this most, and they are frequently the ones least expecting it, because the deduction felt like a permanent saving at the time. It was a timing difference.
This is not a reason to avoid depreciation. It is a reason to model the tax before you agree an allocation, because a schedule that looks neutral can shift a large amount of proceeds from capital gain into ordinary income.
The allocation is negotiable, and both sides want opposite things
You want more of the price allocated to goodwill, taxed as capital gain. The buyer often wants more allocated to equipment and to a non-compete, because those amortise or depreciate faster and give them a quicker deduction.
Both parties must report the same allocation to the IRS on Form 8594, so it has to be agreed rather than assumed. Sellers who leave it to the buyer's accountant to draft usually find it drafted in the buyer's favour.
**Treat the allocation as a price term.** If a buyer's preferred allocation costs you $70,000 in additional tax, that is $70,000 of purchase price and it belongs in the negotiation alongside every other number.
What legitimately reduces the bill
An installment sale spreads the gain across the years you receive payment, which can keep you out of higher brackets and defer tax. It also leaves you carrying credit risk on the buyer, so it is a real trade rather than a free saving.
Section 1202 qualified small business stock can exclude a large share of the gain on qualifying C corporation shares. Most small businesses do not qualify, but the ones that do should not miss it.
Structuring as a stock sale where you can, which converts a mixed-rate outcome into a mostly capital one.
Timing the sale across tax years, allocating proceeds to a year with offsetting losses, charitable structures for owners with philanthropic intent, and qualified opportunity zone reinvestment. Each has real conditions and real trade-offs.
State tax matters too, and it varies enormously. Where you are resident at the time of sale can be worth more than most of the federal planning above, and the rules on establishing residency are strict and heavily examined.
When to have this conversation
Before the letter of intent. Once the LOI sets the structure and the broad allocation, most of the planning options have closed and you are negotiating within someone else's frame.
Bring in a CPA who has done business sales specifically. This is a specialised area and general tax preparation experience is not the same thing. The fee is trivial against the amounts involved.
Nothing on this page is tax advice, and rates and thresholds change. Use it to know which questions to ask, and get the numbers from someone looking at your actual return.
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