Capital gains tax on selling a business falls on only part of the price, so Apollon Wealth Management first splits an offer into long-term capital gain and ordinary income from depreciation recapture. In the hypothetical $6 million asset sale below, $1 million of the $5.8 million gain is recapture taxed as ordinary income, so only $4.8 million gets long-term capital gains rates (check the current IRS rates).
The split matters because the buyer's lawyer usually drafts it, and the draft favors the buyer. A few lines on a schedule can move hundreds of thousands of dollars from one tax treatment to another.
Below, a hypothetical couple, Gus and Deborah, run five checks on their own offer. Each step lists what to gather, what to decide and the slip people make. To test your own figures, plug them into the calculator on our site and compare the result with theirs.
By Marcus Thompson, CFA — Wealth Manager | Reviewed by Hiroshi Tanaka, CFPMarcus builds diversified portfolios for high-net-worth clients, with deep expertise in asset allocation and risk management.
Every $100,000 an appraisal moves from equipment to goodwill converts ordinary income into capital gain. Read the allocation before you read the price.
CPA and Tax Director, Apollon Wealth Management
An installment note spreads the cash, but recapture usually lands in year one. Check that figure against the cash you will actually hold.
Senior Financial Planner, Apollon Wealth Management
Step 1: Gather the three papers that set your gain
Before anyone runs a number, pull three documents: the company's last return (Form 1120-S for Gus and Deborah's S corporation), the fixed-asset and depreciation schedule from the CPA's file, and the buyer's draft purchase price allocation. Working from the $6 million headline is the slip here. Gain is price minus basis, and each asset class on the allocation is taxed its own way, so the headline alone tells you almost nothing about the tax cost.
Step 2: Split the $6 million offer into ordinary income and capital gain
Gus and Deborah, a hypothetical couple, open the fixed-asset schedule attached to their landscaping company's S corporation return. Trucks and mowers that cost $1.4 million show $1.2 million of depreciation taken, leaving a $200,000 basis. The private-equity buyer's draft allocation puts $1.2 million of the $6 million price on that equipment and $4.8 million on goodwill with a zero basis.
Equipment gain is $1.2 million minus $200,000, or $1 million. Because $1.2 million of depreciation was taken, all of it is recapture, taxed as ordinary income. Goodwill gain is the full $4.8 million, long-term capital gain. Total gain: $5.8 million.
The $1 million of recapture stacks on top of their other income. For 2026, the IRS taxes ordinary income above $768,700 for a married couple filing jointly at 37 percent. For the capital gains rate on the other $4.8 million, check the current IRS rates; we won't guess it here.
Here's the order a CPA follows. First, list each asset class on the allocation. Then subtract its basis, using the depreciation schedule. Next, treat gain up to the depreciation already taken as ordinary income. Whatever is left is long-term capital gain if the asset was held more than one year. Last, confirm with the CPA that Gus materially participates, so the 3.8 percent net investment income tax generally doesn't apply.
This is the lever that actually saves tax. If a fair equipment appraisal supports $900,000 instead of $1.2 million, recapture drops to $700,000 and capital gain rises to $5.1 million. Total gain is still $5.8 million, but $300,000 moved from ordinary to capital treatment.
The buyer will resist, because equipment is written off faster than goodwill, which is amortized over 15 years. Both sides report the final split on Form 8594. Signing off on the buyer's allocation as boilerplate is the slip.
The rule we'd apply: before you sign the purchase agreement, compare the buyer's equipment values with what an appraisal supports. Every $100,000 a fair valuation moves from depreciated equipment to goodwill turns $100,000 of ordinary income into long-term capital gain. Multiply that $100,000 by the difference between your ordinary rate and your capital gains rate, and you have the saving.
The numbers from the schedule
The one lever that saves tax
Before you sign, compare the buyer's equipment values with an appraisal. Once the purchase agreement is signed, the allocation is effectively fixed.
| If | Then | What to do |
|---|---|---|
| Buyer puts $1.2M on equipment | $1M taxed as ordinary income | Order an equipment appraisal |
| Appraisal supports $900,000 | $300,000 becomes capital gain | Settle allocation before signing |
| Son pays $600,000 per year | Year one: $1.48M income | Hold cash for year-one tax |
| Gus materially participates | 3.8% NIIT generally not owed | Document his hours with CPA |
| Closing at age 63 | Part B $689.90 at 65 | Budget the higher premium |
Step 3: How much does each option save, and which ones only move the tax?
Only one of these options changes the character of the gain. Option (b) is a real saving, since $300,000 shifts from ordinary income to capital gain. Option (c) shifts timing only, and the full $1 million of recapture still lands in year one. Option (d) removes the gain through the step-up at death, but it produces no retirement cash.
Market values can fall, and the son's note is only as good as the landscaping company that pays it, so treat every cash flow below as an estimate.
| Option | Sale-year tax cost | Total tax over time | Year-one cash |
|---|---|---|---|
| (a) Cash, allocation as drafted | $1M ordinary, $4.8M capital | Baseline | Full price |
| (b) Cash, appraisal-backed | $700K ordinary, $5.1M capital | Lower: real saving | Full price |
| (c) Son's ten-year note | $1M ordinary plus $480K capital | Timing shift only | $600,000 |
| (d) Hold shares until death | None while held | Gain removed by step-up | None |
Step 4: How long before closing each move has to be in place
Some moves come too early. Section 179 expensing of new trucks in the year before a sale only adds recapture. Gifting or restructuring shares before the price is known can lock in the wrong values. Others come too late, because the allocation is effectively fixed at signing and note terms can't be rewritten after closing.
Order trips people up as well. Choosing between the son and the private-equity buyer before pricing the year-one tax under the note is backwards. So is closing at 63 without planning for Medicare: sale-year income sets Gus's Part B premium at 65, and at 2026 rates joint income of $750,000 or more means $689.90 per month.
Taking the generic tip to sell on installments too literally would leave Gus and Deborah reporting $1.48 million of income in year one of the son's note, the full $1 million of recapture plus $480,000 of capital gain, while receiving only $600,000 of cash.
Questions to put to the CPA or advisor:
Too early
Too late or out of order
- What is our stock basis on Form 7203?
- Which allocation lines carry recapture, and how much?
- Does an appraisal support a lower equipment value?
- How much cash do we need for year-one tax under the son's note, including state tax?
- Will our Form 8594 match the buyer's?
When you're older, widowed or own a C corporation
Merle, a hypothetical 68-year-old widower, owns a $2.5 million machine shop, and his estate sits well under the $15,000,000 per-person exclusion for 2026. If he doesn't need the cash, holding the shares until death can give his daughters a stepped-up basis and wipe out the gain. Gus and Deborah need sale cash to retire at 63 and 60, so for them the allocation fight is the real lever. The usual advice also breaks for a C corporation, where an asset sale is taxed twice (ask the CPA about the qualified small business stock rules), for an LLC taxed as a partnership, and for equipment held one year or less, which never gets long-term treatment.
The allocation question to put to Apollon Wealth Management
Ask Apollon Wealth Management this: on our draft allocation, how many dollars are recapture, and what is the year-one tax cost under the outside buyer's cash compared with our son's note? Bring the depreciation schedule and the letter of intent to the first progress meeting. The example assumes an asset sale by an S corporation whose owner materially participates, and it doesn't price state income tax or interest on a seller note.
The headline price tells you almost nothing about the tax cost; the allocation tells you most of it.
Your questions about capital gains tax on selling a business, answered
Our buyer wants to close on December 15; would pushing closing into January lower our tax cost or just move it to the next return?
Usually it moves the tax to the next return without shrinking it. The recapture and capital gain are the same either way. The shift can matter if your other income differs between years, or for Medicare premiums, so have the CPA price both years before you agree.
Once we've signed off on the purchase price allocation, can we change it on our tax return later?
Generally no. Both sides report the allocation on Form 8594, and the IRS expects the numbers to match what the purchase agreement says. Changing it later usually takes the buyer's agreement or a documented reason, so settle it before signing.
Read the rules at the source
This content is general information only and does not constitute investment, tax or legal advice tailored to your circumstances. Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. Consult a qualified professional before making any financial or legal decision.