Step-by-step: How to approach taxes when selling

  1. Confirm the sale structure. Asset sales (common for buyers) and stock or membership‑interest sales (common for owners) have different tax effects. In an asset sale the buyer usually allocates purchase price to specific assets (inventory, equipment, goodwill); sellers may face a mix of ordinary income (recapture) and capital gains. In a stock sale the seller typically recognizes capital gain on the equity, but buyers get fewer immediate tax deductions.

  2. Calculate amount realized and adjusted basis. Amount realized = cash + liabilities assumed + other consideration. Adjusted basis = original cost plus improvements minus allowable depreciation. Taxable gain = amount realized − adjusted basis. (Example: sale price $200,000; basis $50,000 → gross gain $150,000.)

  3. Separate ordinary vs. capital gain. Depreciation previously claimed on tangible and some intangible assets triggers ordinary income under depreciation recapture rules (see IRS Pub. 544). The portion that qualifies as capital gain (usually goodwill and other intangible assets held >1 year) is taxed at long‑term capital gains rates if you meet the holding‑period test.

  4. Watch for special taxes. Net Investment Income Tax (3.8% NIIT) may apply to some sellers with higher modified adjusted gross income. State taxes also vary and can materially change the net proceeds.

  5. Report correctly and make estimated payments. Gain and asset dispositions generally flow to Form 8949 and Schedule D, and sales of business property with ordinary-portion gain may use Form 4797. Installment sales use Form 6252 to report deferred gain over time. Sellers who expect tax due should make quarterly estimated payments to avoid penalties (see IRS estimated tax guidance).

Key tax issues to evaluate

  • Asset allocation and purchase agreement language: the way the buyer allocates the purchase price among asset classes determines taxable character for both sides.
  • Depreciation recapture: previously deducted depreciation can be taxed as ordinary income up to the amount of depreciation allowed (see IRS Pub. 544 and Form 4797 instructions).
  • Holding period: assets or equity held longer than one year typically qualify for long‑term capital gains treatment, which lowers tax rates compared with ordinary income.
  • Entity type and double taxation risk: selling assets of a C corporation can produce corporate‑level tax and then shareholder tax on distributions (double tax). Sales of pass‑through entities (LLCs, S corps) usually pass gains to owners’ individual returns.
  • Installment sale and timing strategies: spreading payments over years can smooth brackets and defer tax, but requires careful structuring and use of Form 6252. Some tax‑deferral vehicles (like 1031 exchanges) generally apply only to real property after 2017 and won’t cover most business goodwill.

Practical example (concise)

Sale price: $200,000
Adjusted basis: $50,000
Depreciation claimed (total): $20,000

Tax math: gross gain = $150,000. Depreciation recapture converts $20,000 to ordinary income (reported on Form 4797); remaining $130,000 is candidate for long‑term capital gain if holding periods are met.

Reporting & common forms

  • Form 8949 / Schedule D — report capital gains and losses.
  • Form 4797 — report ordinary gains from disposition of business property (depreciation recapture).
  • Form 6252 — report installment sale income when you receive payments over time.
  • K‑1 / Form 1120 / Form 1120‑S — look for pass‑through reporting or corporate returns depending on entity type.

(Refer to IRS publications for each form for details and current instructions.)

Tax‑planning strategies and professional tips

  • Negotiate purchase price allocation with buyer to reduce ordinary income exposure where appropriate, but follow arm’s‑length rules and document the allocation in the purchase agreement.
  • Consider an installment sale to spread tax recognition into lower‑income years, but weigh collection risk and interest rules.
  • Evaluate entity consequences early: a tax‑aware sale structure (asset vs. stock; asset sale followed by section reorganization, etc.) can change net proceeds dramatically—get a CPA or transaction tax attorney involved.
  • Preserve records for basis and depreciation schedules; lost documentation is a common, costly problem.

For tactical guidance on capital gains timing and reduction strategies, see FinHelp’s guides on Capital Gains Tax: Strategies to Minimize It and Capital Gains Strategies: Timing, Installment Sales, and 1031 Alternatives. For help calculating adjusted basis after a sale, read Understanding Tax Basis Adjustments After a Business Sale.

Common mistakes to avoid

  • Failing to separate ordinary vs. capital gain in the allocation.
  • Overlooking state tax or NIIT exposure.
  • Waiting until closing to consult a tax advisor—structuring options close quickly during negotiations.

Next steps

  1. Gather purchase agreements, asset lists, historical tax returns, and depreciation schedules.
  2. Talk with a CPA or tax attorney early in negotiations.
  3. Run a modeled tax pro forma showing best‑ and worst‑case tax outcomes before signing.

Disclaimer & sources

This article is educational and not individualized tax advice. Talk with a CPA or tax attorney about your specific transaction. Authoritative resources: IRS Publication 544 (Sales and Other Dispositions of Assets), IRS Publication 537 (Installment Sales), and instructions for Forms 8949, Schedule D, Form 4797, and Form 6252 (IRS.gov). Additional planning materials: FinHelp guides linked above.