Selling a business triggers federal tax that depends on three things: whether you sell assets or ownership shares, how you and the buyer split the price across those assets, and how long you owned the business.
Gain on a business you owned for more than one year generally faces federal long term capital gains rates of 0%, 15%, or 20%, and some owners owe a 3.8% surtax on top. At Turner Investments, we research how tax rules change what sellers keep, and this guide covers the 2026 numbers.
Key Points
- Most sellers owe 15% or 20% federal tax on gain, plus a possible 3.8% surtax.
- Asset versus stock structure decides how much of the price becomes ordinary income.
Federal Tax Rates on a Business Sale in 2026
The federal government taxes gain on a business you owned for more than one year at 0%, 15%, or 20%, based on your taxable income and filing status. The IRS treats gain on a business you owned for one year or less as ordinary income, with rates from 10% to 37%.
| Filing status | 0% rate up to | 15% rate up to | 20% rate above |
|---|---|---|---|
| Single | $49,450 | $545,500 | $545,500 |
| Married filing jointly | $98,900 | $613,700 | $613,700 |
The 3.8% Net Investment Income Tax (NIIT) applies once modified adjusted gross income passes $200,000 for single filers or $250,000 for married couples filing jointly. Congress does not index those thresholds for inflation, so they catch more sellers each year.
The NIIT lifts the top federal rate on gain to 23.8%. Owners who actively work in an S corporation or partnership can often reduce or avoid the NIIT on a sale, but the result depends on the assets the company owns.
Asset Sale or Stock Sale
Buyers usually prefer to buy assets, and sellers usually prefer to sell stock or ownership interests, because each structure produces a different tax bill.
In a stock sale, you generally report one capital gain on the whole deal. In an asset sale, the IRS looks at each asset separately, and the rate changes with the asset type.
| Asset in the sale | Federal treatment |
|---|---|
| Goodwill and other intangibles you owned over one year | Long term capital gain: 0%, 15%, or 20% |
| Equipment, up to the depreciation you claimed | Ordinary income: up to 37% |
| Real estate, up to the depreciation you claimed | Up to 25% |
| Inventory and accounts receivable | Ordinary income: up to 37% |
| Covenant not to compete | Ordinary income: up to 37% |
Two offers at the same price can leave you with very different amounts after tax. That surprises a lot of owners.
C corporations face a second layer. The corporation pays 21% federal tax on an asset sale, then shareholders pay tax again when they take the money out.
Buyer and seller both report the price allocation to the IRS on Form 8594. You negotiate that split in the purchase agreement, before closing.
Installment Sales
An installment sale lets you report gain as you receive payments, which can keep each year’s income in a lower bracket.
Say a buyer pays you over five years through a seller note. You report gain in proportion to each payment, and interest counts separately as ordinary income. Depreciation recapture does not spread out. You report all of it in the year of the sale.
The tradeoff is credit risk. If the buyer stops paying, you have to collect.
Qualified Small Business Stock
Section 1202 lets owners of qualifying C corporation stock exclude 50%, 75%, or 100% of their gain, depending on whether they held the stock for three, four, or five years. Perkins Coie reports that this tiered schedule applies to stock issued after July 4, 2025.
| Holding period | Gain excluded |
|---|---|
| 3 years or more, under 4 | 50% |
| 4 years or more, under 5 | 75% |
| 5 years or more | 100% |
The exclusion caps at the greater of $15 million or 10 times your basis, according to Greenberg Traurig. The issuing corporation’s gross assets must stay under $75 million, up from $50 million. The gain you do not exclude in the three and four year tiers faces a 28% maximum rate, according to 409.AI.
Baker Tilly confirms that stock issued on or before July 4, 2025 keeps the old rules: a five year hold and a $10 million cap. Grant Thornton lists a domestic C corporation as a requirement, so S corporations and LLCs taxed as partnerships do not qualify.
What the Deal Market Looks Like
BizBuySell’s Q2 2026 Insight Report counted 2,117 small businesses that changed hands, down 10% from a year earlier.
The median sale price came in at $349,250, and buyers paid an average of 2.7 times cash flow. Total enterprise value reached $1.8 billion. For all of 2025, BizBuySell reported transactions up 0.4% and total enterprise value of $7.95 billion, up 3% from 2024.
Here is what that looks like in tax dollars. Take a single owner with $100,000 of other taxable income and a $300,000 gain. The gain falls in the 15% bracket, so federal tax on it comes to $45,000. The NIIT applies to the lesser of the $300,000 gain or the $200,000 of income above the threshold, which adds $7,600.
Total: $52,600, or 17.5% of the gain. This example assumes the NIIT applies and ignores deductions, state tax, and depreciation recapture.
Steps Before You Sign a Letter of Intent
Owners get the most room to plan when they start three to five years before a sale, a window SHG Group recommends for building value and fixing weak spots buyers find in diligence.
- Ask a CPA to model the sale as an asset deal and as a stock deal.
- Draft the price allocation before you accept an offer.
- Price a seller note against an all cash close.
- Check whether any of your shares qualify under Section 1202.
- Confirm your state of residence on the closing date and what that state taxes.
Florida, where Turner Investments is based, has no state income tax on individuals. Most other states tax the gain, so your state of residence at closing changes the total.
Turner Investments publishes research, not tax advice. Take these numbers to a CPA or tax attorney who has your financials.
Conclusion
Your federal tax on a business sale depends more on structure, price allocation, and timing than on the headline price. Ask a CPA to model all three before you sign anything.