What Taxes Do You Pay When You Sell a Business?

What Taxes You Pay When You Sell a Business

Disclaimer: This is a general illustration for educational purposes only, not tax advice. Every situation is unique and tax rules change — confirm everything with your own CPA before you act.

When you sell a business, you are taxed on your gain (the sale price minus your tax basis), and the rate depends on how that gain is classified. Long-term capital gains generally run 0% to 20% federally, near 23.8% at the top once the 3.8% net investment income tax applies, while ordinary income, including depreciation recapture and inventory, is taxed at up to 37%. Because structure and allocation can swing your after-tax proceeds by 20% to 40%, this is worth planning early. Model your number with the valuation calculator so you know what you might keep.

Why It Matters

The biggest lever is deal structure. In an asset sale, the price is allocated across asset classes, and each class is taxed differently: goodwill is a capital gain, equipment triggers ordinary-income recapture, and a non-compete is ordinary income. In a stock sale, the whole gain is generally a single capital gain taxed once, which is why sellers usually prefer it and buyers usually prefer asset sales. Roughly 90% of small deals are asset sales, so the allocation you negotiate can be worth tens of thousands of dollars, sometimes far more.

Timing and entity type matter too. An installment sale spreads your gain over several years and can keep you in lower brackets, while C-corporation owners face a double-tax risk on asset sales that S-corps and LLCs generally avoid. None of these levers are one-size-fits-all, which is exactly why a professional review matters.

It also helps to know what actually gets taxed. You owe tax on your gain, not the full sale price, so your original investment (your basis) comes back tax-free. The gain is then split by character: the capital-gains portion is taxed at the lower rate, while depreciation you previously deducted is "recaptured" and taxed as ordinary income. Inventory and the value assigned to a non-compete are ordinary income too. Because these pieces are negotiated in the purchase agreement, the paperwork you sign quietly decides a large part of your bill, which is one more reason to have a CPA at the table early.

How to Use It

Bring in a CPA or tax attorney before you sign a letter of intent, because the structure set in the LOI is hard to unwind later. Ask them to model your after-tax proceeds, review the purchase-price allocation, and confirm whether strategies like an installment sale or QSBS apply to you. Pair that with a clear picture of how much you need to retire, and read the full companion guide, how to reduce taxes when you sell your business, for the deeper strategies.

Again, the strategies and numbers above are general illustrations, not advice, and not a guarantee of any outcome. Your result depends on your basis, entity type, state, and final deal terms. Please review your specific situation with a CPA or tax attorney before making any decision.