When a business owner sells their business how are they taxed?

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September 15, 2021

by a searcher from The University of Michigan - Stephen M. Ross School of Business in Rockford, MI, USA

I'm sure my question has a very long answer with a lot of nuance. What I'm trying to generally understand is how small business owners are taxed on the sale of their companies, especially those that are pass-throughs (LLCs, S-Corps). In other words, is the sale of a business subject to income tax, capital gains tax, both, neither, etc.?

Part of why I'm asking is to better understand how some proposed tax code changes will affect business owners pursuing a sale.

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Reply by a searcher
from University of Oxford in Austin, TX, USA
If the seller is structured as a C corp it is possible for them to pay zero taxes as a Qualified Small Business Stock sale. They have to have held the stock for 5 years and it must be a small business worth less than $50 million.
https://www.exitstrategiesgroup.com/sell-business-tax-free-1202
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Reply by a searcher
from University of Texas at Austin in Lexington, KY, USA
It will mostly be capital gains based on the book value of the assets sold (or carrying value of the stock). There are ways to mix it out over a couple of years so the tax impact isn't all at once - seller note, consulting/employment agreement post close. But the majority of the tax impact will be in the year of the sale.
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