Selling a business is often one of the most significant financial events in an owner’s life, and the taxes tied to that decision can materially change the outcome. The sale price may look attractive on paper, but what you ultimately keep depends on how the transaction is structured, how long you have owned the business, and how different parts of the deal are taxed under U.S. law.
When you sell a business, assets held more than a year typically qualify for long-term capital gains rates (0%, 15%, or 20% depending on your income), but other components of the sale, like inventory or depreciation recapture, may be taxed as ordinary income at much higher rates. State taxes can further bite into your proceeds, with some states adding double-digit taxes on top of federal rates.
A transfer of ownership usually produces complex taxable results across asset classes. Multiple asset categories often move at once, which can create several types of income in a single year. That concentration makes the sale a major taxable event and a planning priority.
At its core, the calculation is simple: proceeds minus adjusted basis equals gain. Proceeds include the sales price plus liabilities the buyer assumes. That amount is the starting point for measuring what you must report.
Basis is the original cost adjusted for depreciation and other changes. Depreciation lowers basis, so past deductions can raise the recognized gain on exit.
Next, you will learn how deal structure, allocation, and timing shift exposure between capital gains and ordinary income and how to model outcomes before you sign.
When you move ownership, each asset class can trigger its own reporting rules and rates. For sellers, that means the deal is often many smaller sales wrapped into one closing.
Classify each item, capital assets, depreciable business property, and inventory follow different rules. Capital assets may qualify for long-term capital gains rates, while inventory and ordinary income items are taxed as regular income.
Depreciation recapture can recharacterize gain from capital to ordinary income for certain fixed assets. That shift can raise effective rates on the same headline sale price.
Most reporting happens in the year the sale closes, even if payments arrive later, though installment rules can allow partial deferral. Sellers should plan for estimated payments and possible withholding at closing.
How you transfer ownership, assets or stock, shapes who pays what and who keeps which risks.
Buyers often favor an asset sale because a stepped‑up basis lets them depreciate equipment and amortize goodwill. For example, on a $20M purchase that assigns $5M to equipment and $15M to goodwill, the buyer can depreciate $5M and amortize roughly $1M per year over 15 years.
With pass‑throughs (LLCs, S corps, partnerships), an asset transfer usually does not create an extra entity‑level levy; owners report their shares directly.
By contrast, an asset transfer inside a C corp can create double collection: the company pays corporate levy on gain, then owners face tax when proceeds distribute. A $10M asset sale with $100k basis can leave nearly all proceeds as gain and yield combined rates near half the profit.
Buyers push asset deals; sellers prefer stock. Stock sales can avoid onerous third‑party consents and speed closing. The final structure often reflects leverage, price tradeoffs, and risk allocation.
Bottom line: structure drives who gets depreciation, who bears liability, and how gains hit returns. Next: how purchase allocation decides capital versus ordinary treatment.
A single purchase price becomes many separate tax events once it is allocated across assets. The way you and the buyer split value drives whether amounts flow as capital gains or ordinary income and can change your post‑deal proceeds.
Sellers often push for larger allocations to goodwill and other capital items to favor long‑term rates. Buyers prefer allocations that allocate value to depreciable items for bigger near‑term deductions. That tension is central to deal talks.
The IRS requires allocation by fair market value across ordered classes. Tangible and identifiable intangibles are assigned value first. Anything left typically becomes goodwill or going‑concern value as the residual.
Goodwill typically produces capital gains for the seller. Payments under consulting agreements and noncompetes are usually treated as ordinary income for the seller. Buyers can often deduct or amortize these payments, shifting benefits between parties.
Use third‑party appraisals to support fair market value conclusions. Once allocation is set, the next step is to review each asset class to see whether it will be taxed as capital gains or ordinary income.
Not every dollar from a sale gets the same rate, what you sell matters. That practical split determines how each dollar is taxed and shapes after‑deal proceeds.
Capital assets can generate capital gains or losses. To get long‑term treatment, most items must be held more than 12 months. Long‑term capital gains usually enjoy preferred rates, commonly 0%–20% depending on income level.
Assets held longer than 12 months can qualify for long‑term capital gains rates. Sellers often push value into capital categories to lower their effective rate.
Inventory is held for customers and is taxed as ordinary income when sold. Accounts receivable also generally produce ordinary income upon collection in a sale context. Many owners expect capital gains, so this can be a surprise.
Depreciation can turn past write-offs into current ordinary income when assets leave your balance sheet. Deductions taken over the years reduce adjusted basis. When proceeds exceed that basis, some or all of the gain may be taxed as ordinary income rather than as capital gains.
Equipment, machinery, and other depreciable property often trigger recapture on exit. The IRS treats the portion of gain equal to prior depreciation as ordinary income. That raises the effective burden compared with long‑term gains.
Consider a machine bought for $10,000 that was depreciated by $6,160. The adjusted basis is $3,840.
That "lesser of depreciation taken or gain" rule is why sellers are surprised. They expect capital gains treatment but find part taxed at ordinary rates.
Deferred payment plans can spread reporting and ease one‑year income spikes. Under IRC §453, sellers who receive at least one payment after the year of closing may report eligible capital gains as payments arrive. This can smooth cash flow and lower peak year rates.
Installments apply when payments span multiple years and the deal qualifies under the statute. Sellers often use this to shift recognition and reduce exposure to higher capital gains taxes and surtaxes tied to annual income.
Inventory, depreciation recapture, and publicly traded securities generally cannot use installment rules. Recapture must be reported as ordinary income in the year of the transaction.
Document terms in the purchase agreement and model multiple payment schedules before you commit. Coordinate this plan with allocation and recapture review so only eligible portions use installments.
Preparing for an exit means aligning deal mechanics with after‑closing realities, not just headline price. Elite Exit Advisors works with sellers to convert complex offers into clear, defensible outcomes that preserve more net proceeds.
We organize financials, clarify add‑backs, and sharpen the narrative behind the numbers. That helps sellers negotiate from credibility, not guesswork.
Advisors assess whether an asset sale or stock sale is proposed and flag likely effects on reporting and rates. They identify negotiation points that can shift value between seller and buyer.
We explain how purchase price allocation, noncompetes, consulting fees, escrow, earnouts, and assumed liabilities change treatment and timing for the seller.
We do not replace legal or tax counsel. Instead, we quarterback planning so allocation, documentation, and reporting align across advisors and remain defensible.
Next steps: If you want help reviewing an offer, LOI, or pre‑sale plan, book a call to get a focused checklist and a short readiness audit.
Structure (asset vs. stock), allocation, basis versus proceeds, and the split between capital gains and ordinary income drive what you actually pay. State rules and marginal rates can further alter outcomes.
Watch for big gotchas: depreciation recapture, inventory and receivables taxed as ordinary income, and the potential C corporation double tax in an asset sale. These items can cut net gain sharply.
Purchase price allocation is the economic lever that decides which assets face capital gains tax versus ordinary treatment. Installment plans can smooth timing but don’t cover inventory or recapture.
Model after-tax proceeds early, review draft allocations, and coordinate with your CPA and attorney before signing. The same sale price can produce very different net results depending on structure and documentation.
