Retiring and selling the company? Here is how the sale is taxed, what you control before the letter of intent, and the order to do it in, starting 2 to 3 years out.
Still early? Here is the full process, from valuation to closing: sell my business: what to do before you sign.
By Hans Goldstein, EA · Updated October 15, 2026
A business sale is taxed by what you sell, not by the headline price. Goodwill is usually long-term capital gain at 0, 15 or 20 percent in 2026, while equipment recapture, inventory and a non-compete are ordinary income up to 37 percent, so the price allocation on Form 8594 sets most of your bill.
If you are retiring, the order matters: decide the structure before the letter of intent, because it is hard to change after. Email me the price, entity and basis for your number.
Federal rates for 2026, from IRS Rev. Proc. 2025-32 section 3.03 (read October 15, 2026):
| Filing status | 0% on long-term gain up to | 15% up to | 20% above |
|---|---|---|---|
| Single | $49,450 | $545,500 | $545,500 |
| Married filing jointly | $98,900 | $613,700 | $613,700 |
| Head of household | $66,200 | $579,600 | $579,600 |
Ordinary income is taxed up to 37% (that bracket starts above $640,600 single and $768,700 joint in 2026). Depreciation on real property is taxed at up to 25% (IRS Topic 409). The 3.8% net investment income tax can apply above $200,000 single or $250,000 joint (IRS Topic 559). State tax is extra. The table is taxable income, so your other income stacks on top.
| Entity | Asset sale | Stock or unit sale |
|---|---|---|
| Sole proprietor or single-member LLC | The only kind: each asset is taxed by type | Not available |
| S corporation or partnership | Each asset taxed by type; recapture is ordinary income | Mostly capital gain, with ordinary pieces for inventory and recapture (IRC §751) |
| C corporation | Taxed at the corporation, then again when proceeds reach you | One level of tax; usually the seller's preference |
| What buyers want | An asset sale: a stepped-up basis they can depreciate | A stock sale only when contracts or licenses cannot move |
If a buyer insists on an asset sale of a C corporation, ask for a higher price to cover the second tax. See asset sale vs stock sale.
In an asset sale the buyer and the seller each file Form 8594 with their returns, splitting the price across seven classes (IRS instructions for Form 8594, read October 15, 2026):
| Class | What is in it | Usual tax result for the seller |
|---|---|---|
| I and II | Cash and deposits; actively traded securities | No gain, or capital gain on securities |
| III | Receivables and marked-to-market assets | Ordinary income |
| IV | Inventory | Ordinary income |
| V | Equipment, buildings and land | Recapture is ordinary (equipment up to 37%; real property depreciation up to 25%); the rest is capital gain |
| VI | Customer lists, licenses, non-compete, other intangibles | A non-compete payment is ordinary income; other intangibles can be capital gain or recapture |
| VII | Goodwill and going concern value | Long-term capital gain at 0, 15 or 20 percent |
The buyer usually wants more in equipment and short-lived assets for faster write-offs. You want more in goodwill. Both forms must match, so settle it in the purchase agreement before closing.
Gain on equipment up to the depreciation you took is ordinary income (IRC §1245). Gain on buildings up to the straight-line depreciation is taxed at up to 25%. Recapture is taxed in the year of sale even if you are paid over several years (IRC §453(i)), so check it before you decide whether a payout helps.
Often not, if you materially participate in the business: gain on assets used in an active trade or business you run is generally outside the tax. A passive owner is in it, and some partnership and S corporation interests are split. Form 8960 settles it; your CPA confirms the facts (IRC §1411, IRS Topic 559).
If you hold C corporation stock from a qualifying company, stock issued after July 4, 2025 can exclude 50% of the gain at 3 years, 75% at 4 years and 100% at 5 years, up to $15 million per issuer, with a $75 million gross-assets test; older stock keeps the 5-year rule and $10 million cap (IRC §1202, read October 15, 2026). California does not follow it. See qualified small business stock.
These are the legal levers, in the order most owners can use them:
Run it on the business sale tax calculator and the structured installment sale calculator.
Hypothetical, top federal rates, October 15, 2026, state tax and the 3.8% tax ignored. An owner sells assets for $2,000,000: equipment $300,000 (basis $50,000, all depreciation, so $250,000 of recapture), inventory $100,000 (no gain) and the rest goodwill.
| Allocation A | Allocation B | |
|---|---|---|
| Goodwill | $1,600,000 | $1,300,000 |
| Non-compete (ordinary) | $0 | $300,000 |
| Equipment recapture, 37% | $92,500 | $92,500 |
| Goodwill at 20% | $320,000 | $260,000 |
| Non-compete at 37% | $0 | $111,000 |
| Federal total | $412,500 | $463,500 |
Moving $300,000 from goodwill to a non-compete costs $51,000 (17 points on $300,000). Same price, different bill. That is why the allocation belongs in the agreement, not in a closing-day form.
Start two to three years out: decide your number, clean the books, line up a buyer, and bring a CPA and attorney in before the letter of intent. If you want the gain taxed as payments arrive instead of in one year, the payout has to be written into the purchase agreement before closing.
On a $3,000,000 California business sale in 2026, the estimated tax was $933,083 as a cash sale and $311,615 on the gain when the same price was paid out over 10 years. The buyer pays in full at closing either way, and you are not the bank.
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| Option | It works when | It fails when |
|---|---|---|
| Cash sale | You need all the money now, or the gain is small. | A big gain is taxed in one year and lands in a high bracket. |
| Seller note | You trust the buyer and want the interest. | Most owners do not want to be the bank. You carry the buyer's risk. |
| Installment sale through a structured arrangement | A large gain and you do not need all the cash at once. Buyer pays in full at closing. | You need all the cash, or a short life expectancy. Must be in the contract before closing. |
| ESOP or employee buyout | You want employees to own it. A special rollover rule may apply to C-corporation stock sold to an ESOP (IRC §1042). | Setup is costly and slow. It is for a C corporation in narrow cases. Ask a specialist. |
| Earnout | The buyer and you disagree on value. | Part of the price depends on future results you may no longer control. |
| 1031 exchange | The deal includes real estate you own. | Does not apply to goodwill, equipment or stock. Only the real estate qualifies. |
| Opportunity Zone or charitable remainder trust | You have a specific goal, such as investing in a zone or giving to charity. | Locks money up or gives some of it away. Needs an attorney. |
| Hold or wind down | No buyer fits, or you want income from the business a few more years. | Value can fall if you leave or the market turns. |
The right answer depends on your entity, your state and your income. Run the numbers for your own deal.
A married couple in their late 60s who materially participate sell their business for $3,000,000. Goodwill has $0 basis. There is $300,000 of fully depreciated equipment, and the $300,000 is §1245 recapture, ordinary income in year one either way. Selling costs are $150,000. Other income is $90,000. Run October 15, 2026 with the Goldstein & Co. engine: 2026 federal and state tables, and a 5.0% payout rate assumption.
| California, cash sale | California, paid over 10 years | California, paid over 5 years | |
|---|---|---|---|
| Tax | $933,083 (32.7%) | $311,615 on the gain (includes the year-one recapture tax), plus $329,239 on the interest | $503,261 on the gain, plus $192,214 on the interest |
| Net after tax, cash sale | $1,916,917 | Not applicable | Not applicable |
| Cash each year | What you withdraw | $369,088 a year | $658,278 a year |
| After-tax money at the end, if untouched | $2,803,077 at year 10; $2,339,474 at year 5 | $3,121,142 at year 10 ($318,065 more) | $2,539,540 at year 5 ($200,066 more) |
In Texas, with no state income tax, the same sale was an estimated $595,075 tax (20.9%) as a cash sale, against $144,541 on the gain over 10 years plus $250,312 on the interest. After-tax money at year 10 was $3,576,729 against $3,389,658, which is $187,071 more.
The 5.0% payout rate is an assumption, not a quote, and the table assumes nothing is spent. These are estimates. If you materially participate, the 3.8% net investment income tax does not reach the business gain (IRC §1411(c)(1)(A)(iii)); your CPA confirms.
Run your own numbers: business sale tax calculator; structured sale calculator; sell for less, net more calculator. More problems like this one: forced to sell? step-by-step guides.
Sources, checked October 15, 2026: IRC §1060, allocation of purchase price; IRC §1245, depreciation recapture; IRC §453, installment method; IRC §1202, qualified small business stock; IRC §1411, net investment income tax; IRC §1042, sales of stock to an ESOP.
If your gain is small, a cash sale is fine. If you need every dollar at closing, or your life expectancy is short, a payout over years may not help. If you sell stock in a C corporation that qualifies for the small business stock exclusion, that may beat any other route.
The first 15-minute scope call with Hans Goldstein, EA is free; a written analysis is $5,000. Estimates only, not a promise of savings.
Send me the sale price and rough basis. Within one business day I'll email you the actual number and the Seller's Guide to §453. If it doesn't fit your deal, I'll tell you that plainly.
No retainer · no obligation. Hans Goldstein, a licensed insurance agent (CA Insurance License #4273294), will contact you and may discuss insurance products, including annuities.
Start two to three years out. Value the business, clean the books, choose a buyer, bring in a CPA and attorney before the letter of intent, then close and file. If you want the gain taxed as payments arrive, put the payout in the purchase agreement before closing.
It depends on what is sold. Goodwill is usually long-term capital gain. Depreciated equipment is ordinary income to the extent of depreciation (IRC §1245). Inventory and receivables are ordinary. The price is allocated among these (IRC §1060).
Yes, through an installment sale. The buyer pays in full at closing, the money goes to an assignment company, and an annuity pays you. You are not the bank. Equipment recapture is still taxed in year one (IRC §453(i)).
It can. Medicare sets the income-related surcharge from your tax return two years earlier, so one big-income year can raise premiums later. Spreading the gain may help. Ask your CPA to check your numbers.
It depends on the price a buyer will pay against the income you would keep by holding. Run both numbers with your CPA before deciding.
In an asset sale the buyer buys the business assets and the price is split among them. In a stock sale the buyer buys your shares. Taxes and liability differ, so get your CPA and attorney to compare before the letter of intent.
It is value tied to you personally rather than to the company. Some owners sell it separately from the company, which can change the tax. Your advisors decide whether it applies.
Only if you hold qualified small business stock in a C corporation, held long enough (IRC §1202). Check with your CPA early.
If you materially participate in the business, the tax generally does not reach the business gain (IRC §1411(c)(1)(A)(iii)). Your CPA confirms.
The first 15-minute scope call is free. A written analysis is $5,000. The calculators and this page are free.
It depends on what you sell. Goodwill is usually long-term capital gain at 0%, 15% or 20% in 2026; equipment recapture, inventory and a non-compete are ordinary income up to 37%; the 3.8% net investment income tax and state tax can add to it. The Form 8594 allocation sets most of the result.
An asset sale is taxed asset by asset: ordinary income on inventory, recapture and a non-compete, capital gain on goodwill. A stock or unit sale is mostly capital gain. A C corporation asset sale is taxed twice, at the corporation and again on distribution.
Long-term capital gain is 0%, 15% or 20% depending on taxable income (20% above $545,500 single and $613,700 joint, IRS Rev. Proc. 2025-32). Ordinary income is taxed up to 37%, and depreciation on buildings up to 25%.
It reports how the purchase price of an asset sale is split across seven asset classes. Both the buyer and the seller file it with their returns for the year of sale, and the numbers must match.
Both. Goodwill and most equity are capital gain. Inventory, receivables, depreciation recapture on equipment and a non-compete payment are ordinary income.
An S corporation is taxed once, at the owner level, with ordinary pieces for inventory and recapture. A C corporation asset sale is taxed at the corporation and again on distribution, so owners usually prefer a stock sale.
These are estimates. Have a qualified tax professional run your real numbers in a 15-minute scope call.
Book my 15-minute callThis is an estimate. Getting it right down to the tee takes your actual tax forms (returns, K-1s, depreciation schedules), a consult and a paid analysis. The first 15-minute scope call is free; the written analysis is $5,000. On a funded structure the insurer pays a one-time commission to the brokerage firm that places it; it is built into the annuity pricing, not a separate fee.
A plain-English guide for sellers on how a structured installment sale defers the tax when you sell a business, practice, or property. It covers the math, the alternatives, and how to tell if your deal fits.
Leave your details and the PDF downloads right away. Within one business day Hans will email a preliminary read on which structure fits your deal. No retainer. On a funded structure, the insurer pays a one-time commission of about 4% of the amount structured to the brokerage firm that places it (Hans’s share is about 2.4%; no trail). It is built into the annuity pricing, not a separate fee.
📞 Hans Goldstein · 213-414-2808 · CA Insurance License #4273294 · Independent §453 specialist · Goldstein & Co. LLC
Hans Goldstein, a licensed insurance agent (CA Insurance License #4273294), will contact you and may discuss insurance products, including annuities.
Hans Goldstein is an Enrolled Agent, admitted to practice before the Internal Revenue Service. Not affiliated with or endorsed by the IRS. General education, not tax or legal advice for your situation.
