Selling a Business Tax Calculator 2026 β Asset vs Stock Sale Comparison
Calculate the tax on selling your business. Model depreciation recapture, goodwill, covenants, and inventory across an asset sale vs. stock sale. See your after-tax proceeds for each scenario.
Asset Allocation (Asset Sale)
$
$
After depreciation taken (adjusted basis) $
$
Original cost + improvements β depreciation $
Total Section 1250 depreciation taken on the building $
Taxed at ordinary income rates $
LTCG rates β most favorable for seller $
Ordinary income β minimize this allocation $
Ordinary income for cash-basis businesses %
Stock Sale Alternative
$
Total proceeds if buyer purchases shares instead $
Your original investment in the business $0
Asset Sale β Net After-Tax
$0
Stock Sale β Net After-Tax
$0
Asset Sale β Total Tax
$0
Stock Sale Advantage
Asset Sale Tax Breakdown by Category
| Asset Category | Sale Price | Basis | Gain/Loss | Tax Type | Tax Rate | Tax Owed |
|---|
How Business Sale Taxes Work
When you sell a business through an asset sale, each category of assets is taxed differently based on its character. The tax treatment ranges from favorable long-term capital gains (15β20%) for goodwill to ordinary income rates (up to 37%) for inventory and covenants.
Tax Rates by Asset Type
Equipment (Sec. 1245): Gain up to depreciation = ordinary income (up to 37%)
Real Estate (Sec. 1250): Depreciation portion = 25% unrecaptured gain; above = LTCG
Inventory: Ordinary income rates (up to 37%)
Goodwill: Long-term capital gains (0% / 15% / 20%)
Covenant Not to Compete: Ordinary income (up to 37%)
Accounts Receivable: Ordinary income (cash-basis taxpayers)
Real Estate (Sec. 1250): Depreciation portion = 25% unrecaptured gain; above = LTCG
Inventory: Ordinary income rates (up to 37%)
Goodwill: Long-term capital gains (0% / 15% / 20%)
Covenant Not to Compete: Ordinary income (up to 37%)
Accounts Receivable: Ordinary income (cash-basis taxpayers)
Example
$200K equipment (fully depreciated basis $0), $800K goodwill, $50K covenant:
Equipment: $200K gain, all ordinary income at 37% = $74,000 tax
Goodwill: $800K gain at 20% LTCG = $160,000 tax
Covenant: $50K ordinary income at 37% = $18,500 tax
Total asset sale tax: $252,500
Stock sale equivalent: $1,050K gain at 20% = $210,000 tax β saves $42,500
Equipment: $200K gain, all ordinary income at 37% = $74,000 tax
Goodwill: $800K gain at 20% LTCG = $160,000 tax
Covenant: $50K ordinary income at 37% = $18,500 tax
Total asset sale tax: $252,500
Stock sale equivalent: $1,050K gain at 20% = $210,000 tax β saves $42,500
Extended
Asset Sale vs. Stock Sale Side-by-Side
Full after-tax comparison of asset sale vs. stock sale with optimal allocation recommendations
Side-by-side comparison of asset sale vs. stock sale tax outcomes with allocation optimization notes.
| Scenario | Total Sale Price | Ordinary Income Tax | LTCG / Recapture Tax | State Tax | Total Tax | Net After-Tax Proceeds |
|---|
Frequently Asked Questions
What is depreciation recapture and how does it affect selling a business?
When you sell business equipment that you have depreciated, the IRS recaptures the tax benefit by taxing the gain up to the amount of depreciation taken at ordinary income rates (up to 37%). For Section 1245 property (personal property like machinery, equipment, vehicles), all prior depreciation is recaptured at ordinary income rates. For Section 1250 property (real estate), any depreciation on the structure is taxed at a maximum 25% "unrecaptured Section 1250 gain" rate.
Why is goodwill taxed at capital gains rates?
Goodwill is an intangible asset representing the business's reputation, customer base, and going-concern value above book value. Because goodwill is typically held long-term and doesn't have prior depreciation deductions, it qualifies for long-term capital gains treatment (0%/15%/20%). This makes goodwill the most tax-favorable component of a business sale β maximizing the goodwill allocation in your purchase price allocation benefits the seller.
What is a covenant not to compete and how is it taxed?
A covenant not to compete (CNC) is an agreement where the seller promises not to start a competing business in a specific area for a defined period. The IRS taxes CNC payments as ordinary income to the seller because the payments are treated as compensation for services (giving up your right to compete). From the buyer's perspective, CNC payments are amortizable over 15 years. Sellers should minimize the CNC allocation to reduce their ordinary income tax.
What is the difference between an asset sale and a stock sale?
In an asset sale, the buyer purchases individual assets (equipment, inventory, goodwill, etc.) and the seller pays tax based on each asset's character. In a stock sale, the buyer purchases the seller's shares, and the entire gain is typically treated as long-term capital gain at preferential rates. Sellers generally prefer stock sales for the tax advantage. Buyers prefer asset sales because they get a stepped-up basis in assets and avoid assuming unknown liabilities. The tax difference can be substantial β often 10β15% of deal value.
How are accounts receivable taxed in a business sale?
Accounts receivable (AR) represent earned but uncollected income. When a cash-basis business sells its AR, the proceeds are ordinary income to the seller because the payments would have been ordinary income when collected. For accrual-basis businesses, AR has already been included in income, so the sale proceeds represent a return of basis. Always identify your accounting method before modeling AR tax treatment in a business sale.