How is a business sale taxed in the US?
Selling a business generally produces a capital gain equal to the sale price minus your tax basis and selling expenses. If you held the business more than a year, the gain is taxed at long-term capital gains rates (0%, 15% or 20% federally), plus a possible 3.8% net investment income tax and any state tax. Asset sales can also trigger ordinary-income depreciation recapture.
What is the QSBS Section 1202 exclusion?
Internal Revenue Code Section 1202 lets shareholders exclude capital gain on Qualified Small Business Stock held more than five years — up to the greater of $10 million or 10 times the basis. The company must be a domestic C corporation meeting active-business and gross-asset tests. It is one of the most powerful tax breaks available on a business sale.
Is it better to sell assets or stock in the US?
Buyers usually prefer an asset sale to get a stepped-up basis and avoid hidden liabilities, while sellers often prefer a stock sale to get uniform capital-gains treatment and potentially QSBS. Asset sales can create depreciation recapture taxed as ordinary income. The structure has major tax consequences, so both sides should model it before agreeing.
What is the net investment income tax?
The net investment income tax (NIIT) is an additional 3.8% federal tax on investment income, including capital gains, for higher-income taxpayers above set thresholds. It applies on top of the long-term capital gains rate, so a large business-sale gain can effectively be taxed at 23.8% federally before any state tax.