More than a quarter of a business sale can go to tax if nothing is planned. Most of that is decided by the structure of the deal, the allocation and the year of closing, all of which are set before you sign.
By Hans Goldstein, EA, founder, Retirement Literacy Foundation · Updated
Admitted to practice before the IRS.
Free education from the Retirement Literacy Foundation, a 501(c)(3). Start with the free one-page Big Sale Tax Worksheet below and run your own numbers.
Get the Free WorksheetBefore you sign a letter of intent, put your own numbers on one page: basis, gain, the recapture slice, the 3.8% check, state tax, and whether the cash at closing covers the tax. Free from a 501(c)(3); nothing to buy.
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The number
A $2,000,000 sale of a business you started from nothing, sold as an asset sale by a married couple in California in 2026, before any planning:
| Layer | Rate | On $2,000,000 |
|---|---|---|
| Federal long-term capital gain (goodwill, most of the price) | 20% above $613,700 of taxable income, 15% below, 0% on the first $98,900 | about $348,000 |
| Net investment income tax | 3.8% above $250,000 MAGI, only if you were a passive owner (IRC 1411(c)) | $0 if you worked in the business; about $66,500 if passive |
| Depreciation recapture on equipment (Section 1245) | ordinary income, up to 37% | depends on what was written off |
| California | 1% to 13.3%, no capital gains rate | about $214,800 |
| Total | about $562,800 (28% of the sale) if you worked in the business; about $629,300 (31%) if you were a passive owner |
Rounded, illustrative, assumes no other income and no selling costs in the year of sale. Federal: 2026 brackets and $32,200 standard deduction (IRS Rev. Proc. 2025-32); California: 2026 FTB rate schedules (FTB Tax News, October 2026). See Sources and review at the bottom of the page.
Texas or Florida seller: subtract the California line. Stock sale of a C corporation that qualifies for Section 1202: the federal line can drop to zero on the first $15 million for stock issued after July 4, 2025 and held 5 years ($10 million for older stock). Installment sale over 5 years: the federal line drops from 20% to 15% on most of it and the 3.8% often disappears, because each year's income stays under the thresholds.
The decisions that set the tax
Before you sign a letter of intent, put your own numbers on one page: basis, gain, the recapture slice, the 3.8% check, state tax, and whether the cash at closing covers the tax. Free from a 501(c)(3); nothing to buy.
The Retirement Literacy Foundation is a 501(c)(3) public charity (EIN 41-5062266). General education, not tax advice. We don’t sell financial products. We’ll email it to you. Unsubscribe any time.
Audit trail
Reviewed for the Retirement Literacy Foundation, a 501(c)(3) education nonprofit. Prepared by Hans Goldstein, EA, retirement educator. Admitted to practice before the IRS. Informational only. Not tax, legal or investment advice. Every figure below cites its source so your CPA or attorney can check it.
Figures are 2026 federal and 2026 California amounts unless stated. Examples are illustrative, rounded, and assume no other income; your numbers will differ. Last reviewed October 10, 2026.
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Hans Goldstein is an Enrolled Agent, admitted to practice before the Internal Revenue Service. Not affiliated with or endorsed by the IRS.