Selling Your Business in 2026: Keep More of the Price by Spreading the Gain

Here is what spreading the gain does on a typical owner-operated business: $3,000,000 price, $2,700,000 of it goodwill with zero basis, $300,000 of fully depreciated equipment. In California the total tax drops from $998,079 to $757,388 when the goodwill is paid out over 10 years. In a state with no income tax, from $635,975 to $479,973. Same price, same buyer, smaller tax bill, because each year's slice of the gain lands in lower brackets.

Go deeper: how each asset in a business sale is taxed on Big Sale Tax.

A $3M business sale: all at once vs. spread over 10 years

How these were run: married filing jointly, $150,000 of other taxable income every year, you materially participate in the business (so the 3.8% net investment income tax does not reach the business gain), 2026 federal and state tax tables applied to every year, and federal alternative minimum tax included. Interest the buyer or insurer pays on the unpaid balance is extra ordinary income and is not in these figures; it is also extra money you would not have earned on a check you already sent to the IRS. Same engine as our calculator, so you can rerun it with your own numbers.

What can be spread, and what is taxed in year one anyway

A structured installment sale under IRC §453 spreads the capital gain. A few pieces of almost every business sale are ordinary income and land in the year of sale no matter how the payments are scheduled. Knowing them up front is what makes the year-one number predictable:

• Goodwill and other capital assets: spread across the payment schedule you choose. This is usually the largest part of the price.
• Depreciation recapture on equipment (§1245): taxed in the year of sale even if no cash arrives that year (IRC §453(i)).
• Inventory and supplies: excluded from installment reporting (IRC §453(b)(2)), ordinary income in year one.
• Receivables of a cash-basis business: zero basis and ordinary income (IRC §1221(a)(4)).
• Non-compete, consulting and employment payments: compensation for your future services or your promise, so ordinary income when paid.
• Interest on the deferred payments: ordinary income each year it is paid.

The price allocation in the purchase agreement (IRC §1060, Form 8594) decides how much of the price sits in each bucket, so it is worth negotiating before signing, not after.

Asset sale or stock sale

Buyers usually prefer to buy assets (they get a fresh depreciable basis); sellers often prefer to sell stock (one capital gain, no recapture inside the entity). If you own a C corporation and it sells its assets, the corporation pays a flat 21% on the gain and you are taxed again when the proceeds come out. That double layer is the single most expensive surprise in small-business exits, and it is why the structure of the deal matters more than the headline price. Either way, the installment method can apply to the capital-gain portion you receive.

Personal goodwill

When the value of a business rests on the owner's own relationships and skill, part of the goodwill may belong to the owner personally rather than to the company. In Martin Ice Cream Co. v. Commissioner, 110 T.C. 189 (1998), the Tax Court treated the founder's customer relationships as his own asset, so they were not taxed at the corporate level. The planning point cuts both ways: in Howard v. United States (9th Cir. 2011), an owner who had signed a non-compete with his own corporation was held to have no personal goodwill, and the payment was taxed as a dividend. Personal goodwill has to be real and documented before the sale.

If you hold qualified small business stock, use that first

Section 1202 can exclude gain on C corporation stock entirely. For stock acquired after July 4, 2025 the cap is $15,000,000 per company, the company's gross assets must have been $75,000,000 or less, and the exclusion is 50% after 3 years, 75% after 4 and 100% after 5. Stock acquired earlier keeps the old rules ($10,000,000 cap, more than 5 years). Health, law, accounting, consulting, financial services, insurance and other businesses that rely on an owner's skill are excluded. Where QSBS applies, it goes first; the installment structure then handles whatever gain is left.

The rules that keep the deferral intact

• The $5 million line (§453A). If more than $5,000,000 of installment notes from sales over $150,000 are outstanding at year end, an annual interest charge applies to the deferred tax on the excess. Many structures are sized to stay under it.
• No borrowing against the note (§453A(d)). Pledging the installment obligation as collateral is treated as receiving payment.
• Related buyers (§453(e)). If you sell to a related person and they resell within two years, the deferral can accelerate.
• Electing out is a one-way door (§453(d)). The election is due with the return and can be revoked only with IRS consent.
• Earn-outs. A price that depends on future results is a contingent payment sale: with a stated maximum price, basis is recovered as if the maximum is paid; with only a fixed period, evenly over that period; with neither, over 15 years (Treas. Reg. §15a.453-1(c)).

How the structured version works

The buyer pays the full price at closing. The part you choose to defer goes to an assignment company, which funds your payment schedule with a fixed annuity from a highly rated life insurer. You pick the schedule: level payments, a delayed start, a lump in a later year, or a mix. The buyer gets clean title on day one; you get a contract for future payments instead of one large taxable check. Your CPA reports each year's gain on Form 6252.

The trade-off, stated once: money you defer is not available to spend or invest elsewhere until each payment arrives, and the schedule is fixed once it is funded. Most sellers defer part of the price and keep the rest as cash at closing.

When it fits

• A meaningful capital gain, usually self-created goodwill with little or no basis.
• A buyer paying cash at closing (a strategic, a private equity fund, a search fund, a management team with bank financing).
• You do not need all of the after-tax cash in year one.
• The purchase agreement is not signed yet, or can still be amended, so the assignment step can be written in.

When it does not

• The deal is mostly equipment or inventory, so most of the price is year-one ordinary income anyway.
• 100% rollover equity, with no cash to structure.
• You need every dollar of the proceeds in year one.

Frequently asked

Q: Can a structured installment sale work when my buyer is a private equity fund?
A: Yes. The cash portion of the price can be structured. Rollover equity is a separate tax question with its own deferral rules, so it is modeled alongside, not inside, the installment piece.

Q: How much of my business sale can I spread out?
A: The capital gain, usually goodwill and other capital assets. Equipment recapture, inventory, cash-basis receivables, non-compete and consulting payments are ordinary income in year one or when paid.

Q: Is there a minimum size?
A: Insurer minimums start around $100,000 of deferred proceeds, so the structure is not just for eight-figure exits. The savings grow with the size of the gain and your state rate.

Q: Does my CPA need to have done this before?
A: No. The reporting is the standard installment method on Form 6252. I work with your CPA on the numbers before you sign.

Selling a specific kind of business?

• Selling a dental practice
• Selling an insurance agency or book of business
• Selling real estate
• Capital gains tax in your state

No retainer and no fee to you. On a funded structure, the insurer pays a one-time commission of about 4% of the amount structured to the brokerage firm that places it (Hans's share is about 2.4%; no trail). It is built into the annuity pricing.

Educational, not tax or legal advice. 2026 figures. Your CPA or attorney should confirm the allocation, character and reporting for your sale.