How much tax will I pay when I sell?

Taxes on selling a business can take a big bite, and the size of that bite is decided mostly before you sign a letter of intent, not after. Two offers at the same price can leave you with very different amounts after tax, depending on what the buyer is paying for, how it is paid, and what kind of company you own.

This page explains the pieces that move the bill, using IRS rules in plain words and one example with made-up numbers. It is not tax advice. We are not accountants, and your situation will differ. Use it to understand the conversation, then have your CPA run your own numbers.

What changes the bill

1. What the buyer is buying: assets or stock

In an asset sale, each asset is treated as being sold separately to work out the tax. Inventory produces ordinary income. Business property held more than a year falls under section 1231. In a stock sale, you generally sell your shares as one capital asset. Which one you get, and how your company is set up (C corporation, S corporation, LLC or sole owner), can change your bill more than anything else on this page. C corporation owners in an asset sale can face tax at the company level and again when the money comes out to them. Our asset vs stock guide covers the trade-offs.

2. How the price is split across assets

In an asset deal, buyer and seller agree how the price is spread over seven IRS classes, from cash and receivables through inventory, equipment and vehicles, then intangibles such as a covenant not to compete in Class VI, and finally goodwill in Class VII. Both buyer and seller file Form 8594 with their returns, so the split has to match.

The split matters because each bucket is taxed differently for you, and differently for the buyer. More on goodwill usually helps you. More on equipment often helps the buyer. Settle the split in the LOI, not at the closing table.

3. Capital gains vs ordinary income

The IRS says assets held more than one year give long-term capital gain, taxed at federal rates of 0%, 15% or 20% depending on your taxable income. Assets held a year or less give short-term gain, taxed as ordinary income. Ordinary federal income tax rates run from 10% to 37% for 2025. If you own the building or yard and sell it with the company, part of that gain can be unrecaptured section 1250 gain, taxed at a maximum 25% rate.

There may also be a 3.8% net investment income tax above $200,000 of income for single filers and $250,000 for joint filers. Whether it applies to your sale depends on how involved you were in the business and how the deal is set up. Ask your CPA.

4. Depreciation recapture

Your trucks, tools and equipment have probably been written off over the years. When you sell them, the IRS says gain on that kind of property (section 1245 property) is treated as ordinary income to the extent of the depreciation you took. So if a truck is fully written off and the buyer pays $40,000 for it, expect most or all of that $40,000 to be taxed like wages, not like a capital gain. For a trade company with a big fleet, this is often the largest surprise.

5. Installment payments and timing

If you carry a seller note, you have an installment sale: a sale where you get at least one payment after the tax year of the sale. You generally report the gain as you receive it, which can spread the tax over several years. Two catches. Any depreciation recapture is reported in the year of sale, even if the cash comes later. And interest on the note is ordinary income. Earnouts and escrow releases have their own timing rules; ask your CPA how each will be reported.

6. Consulting, non-compete and employment pay

Money paid to you for staying on, as a consultant or an employee, is pay for work, so plan on ordinary income for it. Money for a non-compete may also be taxed less favorably for you than goodwill. Buyers sometimes like moving price into these buckets. Watch for it.

7. State tax

Many states tax the gain from a business sale, a few have no personal income tax, and the rules on where the gain is taxed vary when you live in one state and work in another. We don't give state rates here. Ask your CPA which states can tax your sale, and whether timing or residence changes anything.

A worked example, as a range

Plug your own price, notes and an estimated tax range into the net proceeds calculator. It shows a range, not a tax bill.

Common mistakes

• Signing an LOI before seeing an after-tax number. By the time the purchase agreement is drafted, the structure is mostly set.
• Ignoring the allocation. The split across equipment, inventory and goodwill can move your tax by tens of thousands of dollars.
• Forgetting recapture on the fleet. A paid-off, written-off truck is taxed when it sells.
• Assuming a seller note defers all the tax. Recapture is taxed in the year of sale.
• Moving states in a hurry to save tax. Residence rules are strict. Get advice first.

Questions to ask your CPA, attorney or broker

Ask these before you sign an LOI.

1. Given my entity type, what would I owe on an asset sale and on a stock sale at this price?
2. How should we split the price across equipment, inventory, goodwill, real estate and any non-compete?
3. How much depreciation recapture is in my trucks and equipment?
4. If I carry a note, how much tax is due in the year of sale and how much later?
5. Does the 3.8% net investment income tax apply to my sale?
6. Which states can tax this sale, and does my timing or residence change that?
7. How will consulting, employment or earnout payments be taxed?
8. What estimated tax payments will I need to make, and when?

Sources

1. IRS, Sale of a Business
2. IRS, Instructions for Form 8594
3. IRS, Topic no. 409, Capital gains and losses
4. IRS, Federal income tax rates and brackets
5. IRS, Net Investment Income Tax
6. IRS, Publication 544, Sales and Other Dispositions of Assets
7. IRS, Topic no. 705, Installment sales
8. Chisel Industries, How to sell a plumbing business
9. Search Fund Market, Acquiring an HVAC Business