Selling a C Corporation: The Double Tax and What Actually Fixes It

Most sellers discover this while negotiating, when the buyer insists on an asset purchase and their advisor explains what that does to the after-tax number.

First: a C corporation has no capital gains rate

This is the fact that breaks people's mental model.

Individuals get 0%, 15% and 20% on long-term gains. A C corporation gets none of that. Corporate capital gains are taxed at the ordinary corporate rate — currently a flat 21% federally. Holding an asset thirty years changes nothing at the corporate level.

Then, to get the money from the corporation to you, there is a second event: a dividend or a liquidating distribution, taxed to you personally at up to 23.8% including the net investment income tax.

Asset sale vs stock sale: the whole negotiation in one table

$10,000,000 sale, negligible basis, C corporation.

A $1.6 million difference on the same business at the same price.

And this is why the deal fights: the buyer wants an asset purchase, because it gives them a stepped-up basis in the assets and fresh depreciation. You want a stock sale, because it is taxed once. Somebody has to give, and the usual resolution is a price adjustment that splits the difference.

Add state tax at both levels and the asset-sale number climbs further. In California, the corporation pays 8.84% on top of the 21%, and you pay personal rates on the distribution.

For real estate in a C corp, it gets worse: Section 291

If the asset is depreciated real property held by a corporation, there is a provision that does not apply to individuals at all.

Section 291(a)(1) requires a corporation to recapture an additional 20% of the difference between what would have been recaptured as ordinary income under Section 1245 and what is recaptured under Section 1250. In practice a C corporation recognises more ordinary income on the same building than an individual would.

Individuals get unrecaptured Section 1250 gain at a 25% ceiling. A corporation gets a worse answer, and then the proceeds still have to come out through the second layer.

Real estate is the worst asset to hold in a C corporation, and it is also the one most commonly stuck there — usually because it was put in decades ago, before anyone modelled an exit.

Where an installment sale actually helps, and where it does not

This is where most §453 material oversells, so here is the honest version.

At the corporate level, spreading the gain does very little. The corporate rate is a flat 21%. There are no brackets to smooth, and there is no net investment income tax at the corporate level. Spreading $10 million of gain across ten years still produces 21% on every dollar. You defer the cash outflow, which has genuine time-value worth, but you do not change the rate.

Anyone telling you an installment sale solves the C corp problem at the entity level has not thought it through.

At the shareholder level, it can help a great deal — because individuals do have brackets, do face the 3.8% surtax, and do face state brackets. That is where spreading changes rates rather than just timing.

Section 453(h): the provision that makes this work

There is a specific rule for exactly this situation.

Under IRC §453(h), if a corporation adopts a plan of complete liquidation and distributes installment obligations to its shareholders within 12 months, the shareholders may report their gain on the installment method as payments are collected — rather than recognising the entire liquidation gain in the year of distribution.

In plain terms: the corporation sells on installment terms, liquidates, hands the note to you, and you pay your shareholder-level tax as the payments actually arrive, spread across years and across brackets.

This is one of the few genuinely powerful planning provisions for C corp sellers, and it has hard conditions — a real plan of liquidation, the 12-month window, and eligible installment obligations. It is not something to improvise after closing.

What else is worth checking before you sell

Section 1202 qualified small business stock. If your C corp stock was acquired at original issuance, the company meets the qualified-small-business tests, and you have held it long enough, a substantial portion of the gain on a stock sale can be excluded from federal tax entirely. The thresholds and holding-period rules have been amended recently, so confirm the current version against your acquisition date — but if there is any chance you qualify, this is the first thing to check, because it can dwarf every other planning idea on this page.

Whether the corporation should still be a C corporation. Converting to an S corporation does not solve this immediately: built-in gains are tracked and taxed at the corporate level if the assets are sold within the recognition period. It is a multi-year plan, not a pre-closing manoeuvre. Which is precisely why it has to be started long before there is a buyer.

How the purchase price is allocated. In an asset sale, the split across goodwill, equipment, real property and non-compete changes both the corporate-level character and the buyer's basis. It is negotiated, and it is frequently conceded by sellers who do not realise it is worth arguing about.

Frequently asked

Q: What is the capital gains tax rate for a C corporation? A: There isn't a separate one. Corporate capital gains are taxed at the ordinary corporate rate, currently a flat 21% federally, with no preference for long-term holding. The individual 0/15/20% rates do not apply to corporations.

Q: Why is a C corp asset sale taxed twice? A: The corporation recognises gain and pays corporate tax on the sale. Then, when the after-tax proceeds are distributed to shareholders as a dividend or liquidating distribution, the shareholders pay again on that distribution. Two separate taxable events on the same economic gain.

Q: Does an installment sale reduce the C corp double tax? A: Not at the corporate level in any meaningful way, because 21% is flat — you defer the cash but not the rate. It helps at the shareholder level, where brackets and the 3.8% surtax apply, and §453(h) is the mechanism that lets shareholders use the installment method on a liquidating distribution.

Q: Should I do a stock sale or an asset sale? A: Sellers of C corporations almost always prefer a stock sale because it is taxed once. Buyers prefer an asset sale for the basis step-up and to avoid assuming liabilities. The outcome is usually negotiated into the price, so knowing the size of the tax difference before you negotiate is the whole point.

Q: Is real estate worse in a C corporation? A: Yes. In addition to the double tax, Section 291 requires corporations to recapture an additional 20% of the Section 1245/1250 difference as ordinary income, producing a worse result than an individual would get on the same building.