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Selling a business: the tax, and the five ways to change it

More than a quarter of a business sale can go to tax if nothing is planned. The structure, the allocation and the closing date decide most of it, and all three are set before you sign.

By Hans Goldstein, EA, founder, Retirement Literacy Foundation · Updated October 18, 2026
Admitted to practice before the IRS.

Short answerMore than a quarter of a business sale can go to tax if nothing is planned. In this page's 2026 example, a California couple selling a company for $2,000,000 owes about $562,800 (28%) if they worked in the business, or about $629,300 (31%) if they were passive owners (IRS Rev. Proc. 2025-32; FTB 2026 schedules; last reviewed October 10, 2026).

Free Big Sale Tax Worksheet

One page that shows every tax layer on your sale: federal capital gains, depreciation recapture, the 3.8% net investment income tax, and state tax.

The number

What does selling a business cost in tax?

A $2,000,000 asset sale of a company started from scratch, married couple, California, 2026

Layer	Rate (source below)	Amount
Federal long-term capital gain on goodwill	0% / 15% / 20%	about $348,000
Net investment income tax	3.8% above $250,000 MAGI, only if you were a passive owner (IRC 1411(c))	$0 if you worked in the business; about $66,500 if passive
Equipment recapture (Sec. 1245)	ordinary, up to 37%	what was written off
California	1% to 13.3%, whole gain	about $214,800
Total		about $562,800 (28%) if you worked in the business; about $629,300 (31%) if passive

Rounded, illustrative, assumes no other income and no selling costs in the year of sale. Federal: 2026 brackets and $32,200 standard deduction (IRS Rev. Proc. 2025-32); California: 2026 FTB rate schedules (FTB Tax News, October 2026). See Sources and review at the bottom of the page.

The options, in plain language

How can you pay less tax or spread it out?

Pay it, in the right year. Close January 2, not December 31. Retire first, defer the bonus, harvest losses. Cheapest option below about $500K of gain.
Section 453 installment sale. Spread the goodwill gain over 3 to 10 years; each year can stay under the 20% and 3.8% lines. In a structured version the buyer pays cash at closing and a third party makes the payments. Equipment recapture still lands in year one.
Stock sale + QSBS (Sec. 1202). C corporation stock issued after July 4, 2025: 50% of the gain excluded after 3 years, 75% after 4, 100% after 5, up to $15M per company (IRC 1202). Older stock: 5 years, $10M. S corps and LLCs cannot; conversion planning takes years.
Charitable remainder trust. Give a slice of the company to a CRT before the LOI; that slice sells untaxed, pays you income for life, and gives a deduction now. Only if you would give anyway.
1031 exchange. Real estate only. Exchange the building, not the business. Goodwill, equipment and the practice do not qualify.

Who this is written for: people who have owned the asset for years, often decades, and are selling once, usually around retirement. If you are buying and selling frequently, different rules (dealer status, ordinary income) apply and this page is not for you.

Six questions to bring to your CPA

Asset sale or stock sale, and what does the buyer's LOI assume?
Show me the Form 8594 allocation: goodwill vs equipment vs non-compete vs consulting.
What is my basis, and how much equipment recapture is ordinary income?
If we take 40% at closing and 60% over 5 years, what is the year-one and total tax?
Does a January closing change the bracket, NIIT or state?
Is any of it QSBS, and if not, is a C-corp conversion worth 5 years?

The deadlines that decide it

Allocation and installment terms: in the purchase agreement, not after.
CRT funding: before a binding agreement to sell (pre-arranged sale rule).
Estimated tax: 110% safe harbor or the Q4 payment on a big gain.
Form 6252 every year you receive installment payments.

Common questions

Straight answers

Can I 1031 my business?

No. Section 1031 is real property only since 2018. The building can be exchanged; the business cannot.

Is the earn-out taxed now or later?

Usually as installment income when received, if the agreement is written that way. Get it in the contract.

What about the buyer's non-compete payment?

Ordinary income to you, not capital gain. Every dollar moved into it costs the spread between 20% and 37%.

Does my state matter?

California taxes the whole gain at ordinary rates up to 13.3%. Texas, Florida and Nevada tax none of it. Washington taxes long-term gains on a business or stock sale above a yearly standard deduction, but not real estate.

Audit trail

Sources and review

Reviewed for the Retirement Literacy Foundation, a 501(c)(3) education nonprofit. Prepared by Hans Goldstein, EA, retirement educator. Admitted to practice before the IRS. Informational only. Not tax, legal or investment advice. Every figure below cites its source so your CPA or attorney can check it.

Capital gains rates and brackets 2026: IRS Rev. Proc. 2025-32 (2026 inflation adjustments); IRC 1(h); IRS Topic 409
Net investment income tax 3.8%: IRC 1411; thresholds $200,000 single / $250,000 MFJ, not indexed
Depreciation recapture 25% (unrecaptured 1250) and 1245: IRC 1(h)(6), IRC 1245, IRC 1250; IRS Pub. 544
Section 121 home-sale exclusion: IRC 121; IRS Pub. 523; surviving-spouse 2-year rule IRC 121(b)(4)
1031 exchange rules: IRC 1031 (real property only after TCJA 2017); Treas. Reg. 1.1031(k)-1 (45/180 days, QI); IRS Form 8824
Delaware Statutory Trust as 1031 property: IRS Rev. Rul. 2004-86
Installment sales: IRC 453; IRS Pub. 537; Form 6252; IRC 453A interest charge above $5,000,000; IRC 453(k) excludes publicly traded stock
Monetized installment sales: IRS Dirty Dozen (IR-2023-65, March 31, 2023, and later years); proposed regs REG-109348-22
QSBS: IRC 1202 as amended by P.L. 119-21 (2025): $15M cap, tiered holding periods for stock issued after July 4, 2025
Charitable remainder trusts: IRC 664; Treas. Reg. 1.664; pre-arranged sale doctrine (Rev. Rul. 78-197)
Step-up in basis: IRC 1014; community property IRC 1014(b)(6)
Inherited IRA 10-year rule: IRC 401(a)(9)(H) (SECURE Act); Treas. Reg. 1.401(a)(9) final regs 2024
California treatment: Cal. Rev. & Tax. Code 17041 (rates; 2026 schedules in FTB Tax News, October 2026), 18031 (1031 conformity), FTB Form 3840 (out-of-state exchange tracking); Prop 19 (Cal. Const. art. XIII A, sec. 2.1)
Purchase price allocation: IRC 1060; IRS Form 8594

Figures are 2026 federal and 2026 California amounts unless stated. Examples are illustrative, rounded, and assume no other income; your numbers will differ. Last reviewed October 10, 2026.

Hans Goldstein is an Enrolled Agent, admitted to practice before the Internal Revenue Service. Not affiliated with or endorsed by the IRS.

Selling a business: the tax, and the five ways to change it

Free Big Sale Tax Worksheet

What does selling a business cost in tax?

How can you pay less tax or spread it out?

Six questions to bring to your CPA

The deadlines that decide it

Straight answers

Can I 1031 my business?

Is the earn-out taxed now or later?

What about the buyer's non-compete payment?

Does my state matter?

Sources and review

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