Taxes on the sale of a business.
How the sale of a business is taxed: capital gains vs. ordinary income, purchase price allocation, asset vs. stock sales, installment sales, and Texas’s lack of a state income tax.
When you sell a business, the gain is usually taxed partly as long-term capital gain and partly as ordinary income, depending on how the purchase price is allocated among the assets sold. Goodwill held more than a year generally gets capital gains treatment, while depreciation recapture on equipment and some other items is taxed as ordinary income. Texas has no state personal income tax, so Texas owners usually face federal tax only. Deal structure, allocation, and timing can change the result a lot, so work with a CPA before you sign a letter of intent.
Allocation decides the tax
In an asset sale, buyer and seller agree how the price is split among equipment, inventory, real estate, non-compete agreements, and goodwill, and both report it to the IRS. Sellers generally prefer more allocated to goodwill (capital gain); buyers often prefer more allocated to equipment they can depreciate quickly. Negotiate allocation as part of the deal, not after.
Asset sale vs. stock sale
Stock sales can produce mostly capital gain treatment for the seller but are less common in small deals because buyers prefer asset purchases. Entity type matters too: C corporations can face two levels of tax in an asset sale. See asset vs. stock sales.
Installment sales and earnouts
A seller note can spread the gain over the years you receive payments, which may lower the tax in any one year. Earnout payments have their own timing and character rules. See seller financing and earnouts.
The Texas advantage
Texas has no state personal income tax, which can mean meaningfully more after-tax proceeds than an identical sale in a high-tax state. Texas franchise tax, sales tax permits, and any real property taxes still need to be settled at closing.
Plan before you list
The biggest tax savings come from planning before a sale: entity structure, holding periods, allocation strategy, and how proceeds will be reinvested. This guide is general information, not tax advice; your CPA and tax attorney should model your specific deal.