Taxes When You Sell a Business: Asset vs Stock, Allocation, Installments, State Tax

You pay tax on your gain, which is the price you receive minus your tax basis, and the structure of the deal decides how much of that gain is taxed as capital gain and how much as ordinary income. Price matters, but structure moves your after-tax number just as far.

Asset sale

The buyer purchases the business's assets, not your ownership shares. The purchase price is allocated across asset classes, and each class is taxed differently to you. Inventory and receivables produce ordinary income. Equipment produces ordinary income up to the depreciation you already deducted (depreciation recapture) and capital gain above it. Goodwill is generally taxed as capital gain (how goodwill is taxed). Money paid for a non-compete is ordinary income. Buyer and seller each report the allocation to the IRS, and the two filings have to match.

Stock sale

You sell your shares or membership interests. In general you report one capital gain on the difference between price and your basis. The buyer inherits the entity with its history and liabilities and does not get a fresh depreciable basis in the assets. That is why a buyer prices the risk and often asks for an asset structure instead. The full comparison sits in asset sale vs stock sale for a seller.

Entity type changes the answer

If you own a pass-through entity, an asset sale produces one layer of tax at your personal level. If the business is a C corporation, an asset sale taxes the corporation on the gain and then taxes you again when proceeds come out. That gap is the reason C corporation owners push harder for a stock sale and the reason their CPA needs to run the numbers before the first LOI.

Installments and state tax

If part of the price is paid later through a seller note, IRS installment rules let you report the gain on that part as principal arrives. Depreciation recapture does not defer: it is recognized in the year of the sale. Interest on the note is ordinary income. State income tax depends on where you reside and where the business operates, and some states treat the gain differently from federal law. Federal rates and state rates change, so this page gives you the mechanics and leaves the rate lookup to your CPA.

Your first action is to pull your last depreciation schedule and your entity's tax return, because every number in the allocation conversation starts there.

Tax rates come from the IRS and your state, but the thresholds that shape your structure come from the SBA rules that govern a buyer's loan, and those are published in SOP 50 10 8.1, in force since October 1, 2026.

When the buyer uses SBA 7(a) financing, these rules decide how much of your price can sit in a note and what that note must look like:

Two details matter for tax planning. First, a seller note that is paid as agreed must be in place for 36 months before it can be refinanced with SBA debt, but a standby note stays on standby for the life of the loan and is never refinanced out early. Second, the lender tests coverage on EBITDA, not SDE, so a note that requires payments from the buyer reduces the buyer's coverage and can break the financing. Read what SDE is to see why the two earnings figures differ.

Ask the buyer's lender early whether your proposed note is on full standby, because the answer decides whether your deferral plan survives underwriting.

On a $3,000,000 price with $650,000 of SDE and an SBA-financed buyer, the seller receives most of the price at close and carries a standby note for the rest of the injection. SDE here means net profit plus one owner's full compensation plus documented add-backs, and it is the figure the price was built on.

Step 1: the injection

Assume for simplicity that total project cost equals the $3,000,000 price. The 10% injection is 10% of $3,000,000, which is $300,000. Half comes as buyer cash and half as a seller note on full standby: 5% of $3,000,000 is $150,000 of cash and $150,000 of standby note.

Step 2: what you collect at close

The SBA loan funds the balance: $3,000,000 minus $150,000 of cash minus $150,000 of note leaves a $2,700,000 loan. At closing you receive the $2,700,000 loan proceeds plus the $150,000 of buyer cash, which is $2,850,000. The remaining $150,000 is the standby note. In a real deal, closing costs and other project costs raise the total, so the figures move, but the structure holds.

Step 3: the tax timing

The gain on the $2,850,000 you receive is taxed in the year of the sale. The gain on the $150,000 note can be reported as principal is paid, which under full standby is after the SBA loan is repaid, up to 10 years out on a loan with no real estate and longer if real estate is financed. That defers the tax. It also means you hold subordinated credit risk behind the SBA lender for that whole period. Interest on a standby note may accrue, and your CPA has to tell you whether accrued interest is taxable to you before you are paid.

Step 4: the allocation

Now the allocation schedule decides the character of the $3,000,000. Every dollar moved from goodwill into equipment becomes ordinary income to the extent of depreciation you already took, and every dollar moved into inventory or receivables is ordinary income. The buyer benefits from allocating toward assets that are deducted faster, so the buyer pushes in that direction and you push the other way. The details of the buckets are covered in how the purchase price is allocated in an asset sale.

If a buyer's diligence finds deferred maintenance or a fleet that needs replacing, that comes off the price as a capital item, which lowers your gain, and it does not reduce SDE before the multiple is applied.

Five tax terms get negotiated, and the stronger position on each depends on facts you can establish before you go to market, not on a rule that favors one side.

• Asset or stock. The buyer's position is stronger when the buyer wants the asset basis and your entity is a pass-through, because the cost to you is small. Your position is stronger when contracts, licenses, or permits do not assign cleanly, which makes an asset sale expensive to execute, or when you hold a competing offer.
• The allocation schedule. The two sides want opposite outcomes, and the schedule belongs in the purchase agreement. If it is left for after closing, you negotiate it with no price left to trade.
• Gross-up for a C corporation. If the buyer insists on assets and the double tax falls on you, the cost of that structure is a price conversation. Put a number on it with your CPA first.
• Seller note terms. A note on full standby counts toward the buyer's injection and is excluded from debt service, so it helps the buyer's financing. A note with payments counts against the buyer's 1.25x coverage. The more your note helps the financing, the more weight it has when you ask for interest, security, or a personal guarantee in return. See seller financing for the mechanics from the note side.
• Earnouts and holdbacks. Contingent payments are taxed when received, and the dispute risk is yours. The earnouts guide covers how they are measured and fought over.

You hold the stronger position on every one of these when you arrive at the LOI with your CPA's after-tax comparison already built, because the buyer then negotiates against numbers instead of preferences.

The costly mistakes happen before the purchase agreement, when price gets agreed while structure is still open.

• Agreeing to a headline price before structure. A price that looks higher can net you less once allocation, recapture, and entity-level tax are applied. Compare offers on after-tax proceeds.
• Counting a standby note as cash. A note on full standby is not paid for the life of the SBA loan. Treat it as deferred, credit-risked money in your planning.
• Ignoring recapture. Sellers who have taken years of depreciation or accelerated deductions on equipment are surprised when that portion is taxed as ordinary income. Pull the depreciation schedule before you set a net-proceeds target.
• Leaving the allocation to the buyer's accountant. The side that drafts the schedule frames the negotiation. Have your CPA propose the allocation as an exhibit to the LOI or the first draft of the agreement.
• Overlooking state tax. Where you live, where the business operates, and where the assets sit can each matter. A sale of tangible assets can also trigger transfer or sales tax questions that vary by state, and the purchase agreement should say who pays them.
• Weak add-back documentation. Add-backs that a buyer rejects lower SDE and therefore the price. The rules are in which add-backs a buyer will accept.

Fix the documentation first, because every dollar of SDE a buyer rejects reduces the price your tax is calculated on, and that is before any structure decision.

Run an after-tax comparison of every offer before you sign, and do it while you are still in preparation, not after the buyer has exclusivity.

1. Gather your documents. Entity type, tax basis, depreciation schedules, and the last tax returns.
2. Have your CPA model each structure. Asset sale, stock sale, and an asset sale with a standby note, each showing federal tax, state tax, and net cash at close.
3. Set your allocation position. Decide what you will accept for equipment, inventory, goodwill, and the non-compete before the buyer proposes a schedule.
4. Check the financing. Ask whether the buyer's loan is SBA-backed. If it is, your note has to be on full standby to count toward the injection, and the lender will order an independent valuation if the price is above $350,000.
5. Document earnings. A buyer-side quality of earnings review is required for an Initial Acquisition at $3,000,000 or more, so clean books carry through to the tax result. See whether you need a quality of earnings report.

Munera's sellers page puts preparation at 4 to 8 weeks, decision to signed LOI at 3 to 6 months, and LOI to close at 60 to 90 days, so the tax modeling fits inside the preparation window.

This is general information about how sale taxes work. Confirm your numbers with your CPA, who will model after-tax proceeds under each structure, and your attorney, who will put the allocation schedule and tax terms into the purchase agreement.