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

About a third of a business sale goes 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.

One-page cheat sheet for this exact situation, plus a live Zoom walkthrough Saturday, October 10, 2026 at 10:30 AM PT / 1:30 PM ET. Nothing is sold.

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The number

What this sale costs if nothing is planned

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	15% / 20%	about $370,000
Net investment income tax	3.8% above $250K MAGI	about $70,000
Equipment recapture (Sec. 1245)	ordinary, up to 37%	what was written off
California	9.3% to 13.3%, whole gain	about $230,000
Total		about $670,000 (33%)

Rounded, illustrative, assumes no other income in the year of sale. See Sources and review at the bottom of the page.

The options, in plain language

Five ways this tax gets paid, spread or shrunk

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. Structured version: buyer pays cash at closing, a life insurer pays you. Recapture still lands in year one.
Stock sale + QSBS (Sec. 1202). C corporation stock held 5 years: up to $15M of gain federally tax free (2025 law). 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, Nevada, Washington (below $278K) tax nothing.

Audit trail

Sources and review

Reviewed for the Retirement Literacy Foundation, a 501(c)(3) education nonprofit. Prepared by Hans Goldstein, retirement educator; IRS Special Enrollment Examination Parts 1, 2 and 3 passed, enrollment pending; California licensed insurance professional #4273294. 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)
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-2023-54 and later); 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), 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 amounts and 2025 California rates unless stated. Examples are illustrative, rounded, and assume no other income; your numbers will differ. Last reviewed September 21, 2026.

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

What this sale costs if nothing is planned

Five ways this tax gets paid, spread or shrunk

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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