Quick answer: No single federal rate applies to a business sale, because each part of the price is classified separately. Capital gain on property held more than one year is long-term and is taxed at 0%, 15% or 20%, depending on taxable income.[1] In an asset sale, recaptured depreciation, inventory and some receivables can be ordinary income. Unrecaptured section 1250 gain has a 25% maximum.[1] The 3.8% net investment income tax may apply.[2] State tax adds another layer.
Key points
- A sale price is not taxed at one rate, because each part of the gain is classified by what was sold, how long it was held and what depreciation was deducted.
- Two offers with the same headline price can leave different amounts after tax, because structure and price allocation change which layers the gain falls into.
- The more of the price that lands on depreciated equipment, inventory and receivables, the larger the share taxed at regular income tax rates.
- A CPA should confirm basis, entity type and the structure options before a letter of intent is signed, because the structure is largely set afterward.
A business sale is taxed in layers, not at one rate
An owner does not pay one rate on a sale price. Tax follows the gain on each asset, or on the shares, and each piece of gain is classified by what was sold, how long the owner held it and what depreciation was deducted along the way. Each class is a layer with its own rate, and the question to answer before agreeing to a structure is how the price divides among them.
IRS guidance on capital gains gives the long-term rates and a separate maximum for unrecaptured section 1250 gain.[1] Separate IRS guidance covers the net investment income tax.[2] The comparison of asset and stock sales explains how structure moves gain between layers, including the second layer of tax a C corporation can face. The table below adds the layers that depend on how the deal is built, and rows without a rate describe general mechanics.
| Layer | What falls into it | Rate |
|---|---|---|
| Long-term capital gain | Capital gain on shares or assets held more than one year, such as goodwill | 0%, 15% or 20%, by taxable income |
| Unrecaptured section 1250 gain | Gain on a depreciated building that reflects depreciation already deducted | 25% maximum |
| Ordinary income | Equipment recapture, inventory, some receivables, non-compete payments | The owner’s regular rates |
| Corporate-level tax | Gain recognized by a C corporation that sells its assets | Set for the corporation |
| Net investment income tax | Part of the gain, if the tax reaches it | 3.8% |
| State income tax | Gain taxed by the owner’s state and the states where the business operates | Set by each state |
Basis, holding period and the long-term rates
Tax applies to gain, which is the amount received less the owner’s tax basis, so a rate table says little until the basis is known. Basis is, in broad terms, what the owner has put into an asset and not yet recovered through deductions. Equipment that was depreciated or deducted in full can carry a basis far below what a buyer will pay, and goodwill the owner built from scratch usually has none.
Capital gain on property held more than one year is long-term.[1] In an asset sale the holding period runs asset by asset. The long-term rates are 0%, 15% and 20%, depending on taxable income.[1] Taxable income for the year of sale includes the gain itself, so the sale year, not a usual year, sets the rate.
Recapture and other ordinary-income items
Depreciation deductions lower an asset’s tax basis. When the asset sells for more than that lower basis, the part of the gain that reverses earlier deductions is recapture. For equipment, recapture is generally taxed as ordinary income. For depreciable real estate, the part of the gain that reflects earlier depreciation is unrecaptured section 1250 gain, which the IRS lists with a maximum rate of 25%.[1] A machine deducted in full in the year it was bought has no basis left, so every dollar a buyer assigns to it is gain, and the portion up to the earlier deductions is recapture.
Other ordinary income has nothing to do with depreciation. Inventory is held for sale to customers, so the price above its basis is generally ordinary income. Receivables depend on the tax accounting method. A business on the accrual method has already reported those sales, so selling the receivables at face value usually creates little further gain. A business on the cash method has not, so the amount paid is generally ordinary income. Amounts assigned to a covenant not to compete are often ordinary income to the seller too, so a large allocation to the non-compete costs the seller more than the same amount allocated to goodwill. A distributor with heavy inventory and equipment can face far more ordinary income than a services firm whose value is mostly goodwill.
The net investment income tax and state tax
The IRS describes the net investment income tax as 3.8% and says it applies to individuals whose income is above thresholds that depend on filing status.[2] It also says net investment income generally includes capital gains.[2] That page does not address business sales, so whether the tax reaches a particular sale is a question for the CPA, who will want to know the owner’s role in the business and the form of the entity.
State income tax is a separate layer, and each state sets its own rules. The owner’s home state and the states where the business operates can both claim a share of the gain. The North Carolina guide covers the state layer for owners there.
The allocation decides which layer a dollar lands in
In an asset sale the purchase agreement divides the price among the assets, and that division decides how the gain splits among the layers. Buyers and sellers of a group of assets that make up a trade or business, where goodwill or going concern value could attach, report the allocation on Form 8594.[3] A buyer prefers more of the price on assets it can deduct sooner, and a seller prefers more in capital gain categories. The guide to purchase price allocation covers the asset classes and the negotiation. Owners lose ground when they compare offers on headline price and see the layer mix only after the letter of intent.
Illustrative example: One price, two allocations
The owner of a pass-through company sells its assets for $10,000,000, so the gain is taxed on the owner’s return. In the buyer’s draft allocation the gain is $300,000 on inventory, $800,000 on equipment (all recapture in both versions), $600,000 on a building (all depreciation already deducted) and $5,700,000 on goodwill. The buyer then asks to move $1,000,000 of the price from goodwill to equipment, which it can deduct sooner. With placeholder rates of 35 percent on ordinary income, 25 percent on unrecaptured section 1250 gain and 20 percent on long-term capital gain, the tax changes as follows.
| Layer | Draft gain | Draft tax | Revised gain | Revised tax |
|---|---|---|---|---|
| Ordinary income (inventory, equipment) | $1,100,000 | $385,000 | $2,100,000 | $735,000 |
| Unrecaptured section 1250 gain (building) | $600,000 | $150,000 | $600,000 | $150,000 |
| Long-term capital gain (goodwill) | $5,700,000 | $1,140,000 | $4,700,000 | $940,000 |
| Total | $7,400,000 | $1,675,000 | $7,400,000 | $1,825,000 |
The shift costs the owner $150,000, which is the $1,000,000 moved times the 15-point gap between the ordinary and capital gain rates. Whether the buyer’s faster deductions are worth that much to it is the negotiating question. State tax and the net investment income tax are excluded. The amounts and rates are invented to show the mechanics and are not benchmarks, and the rates are placeholders, not the rates any owner will pay.
Questions to settle with a CPA before the letter of intent
- Basis and method. What is the owner’s basis in each asset and in the shares, how much depreciation has been taken, and does the business use the cash or the accrual method?
- Entity and structure. How do an asset sale and a stock sale compare after tax for this entity, and could any stock be qualified small business stock, for which the IRS lists a separate maximum rate on taxable gain?[1]
- Allocation. What split will the buyer propose, will the letter of intent state principles for it, and what does each shift between layers cost?
- Other layers. Does the net investment income tax reach this gain, and which states will tax it?
- Timing. If part of the price is paid after closing, which layers can be spread over later years? The installment sale guide explains the mechanism.
The guide to pre-sale tax and entity planning covers the choices that must be made before going to market, and the guide to how to sell a business shows where tax work fits among the stages of a sale. This guide is general education and not tax advice.
Frequently asked questions
How much tax does an owner pay when selling a business?
There is no single answer, because each part of the price is classified separately. Capital gain on property held more than one year is long-term and is taxed at 0%, 15% or 20%, depending on taxable income.[1] Recapture, inventory and some receivables can be ordinary income, and other taxes may add to the total.
What is depreciation recapture when a business is sold?
Depreciation deductions reduce an asset’s tax basis. When the asset sells for more than that reduced basis, the part of the gain that reverses earlier deductions is recaptured. For equipment it is generally taxed as ordinary income. For depreciable real estate, the IRS lists unrecaptured section 1250 gain with a maximum rate of 25%.[1]
Does the net investment income tax apply to the sale of a business?
It may, depending on the owner’s facts. The IRS describes the tax as 3.8%, applying to individuals whose income is above thresholds that depend on filing status, and says net investment income generally includes capital gains.[2] That page does not address business sales, so the seller’s CPA should confirm whether it reaches a particular gain.
How can an owner reduce the tax on selling a business?
The main levers are structure, price allocation, the timing of payments and, in some cases, entity choices made well before a sale. Each affects owners differently, and some may be fixed once a letter of intent is signed. A CPA should compare the alternatives on after-tax proceeds, not on headline price.
Thinking about a sale or an acquisition?
The Impetus Group provides sell-side and buy-side M&A advisory, from preparation and buyer outreach to negotiation and closing. A transactional valuation is often the first step, scoped and priced separately.
Related guides
- Asset Sale vs. Stock Sale: How Structure Changes Your Proceeds: In an asset sale the buyer picks the assets and liabilities it takes. In a stock sale it buys the owner’s shares. See how each affects taxes, risk and proceeds.
- Installment Sale of a Business: How Seller Financing Defers Tax and Adds Risk: The installment method reports gain as a seller note is paid. See how deferral works, which parts of a sale qualify and the default risk the seller takes on.
- Purchase Price Allocation in an Asset Sale: The Seven Asset Classes and Form 8594: How the price of an asset sale is divided among the seven IRS asset classes, why buyer and seller want different splits, and how to negotiate the Form 8594 schedule.
- From Enterprise Value to Equity Value: What the Owner Receives: Enterprise value is the price of the business. Equity value is what owners receive after debt, debt-like items, cash and working capital. See the bridge.
- North Carolina Taxes on the Sale of a Business: What Owners Should Ask Their CPA: North Carolina’s published flat income tax rate, how state tax layers on federal tax in a business sale, and the entity, residency and payment questions for a CPA.
- How Long Does It Take to Sell a Business? Phase by Phase: How long a business sale takes depends on its slowest phase. See what controls each stage, where delays occur and what shortens the path.
Sources
- Topic no. 409, Capital gains and losses. Internal Revenue Service. Accessed October 13, 2026.
- Net Investment Income Tax. Internal Revenue Service. Accessed October 13, 2026.
- About Form 8594, Asset Acquisition Statement Under Section 1060. Internal Revenue Service. Accessed October 8, 2026.
This guide is general education. It is not a valuation opinion, appraisal, investment advice, or legal or tax advice. How these guides are made.