The Tax Implications of Selling Your Business Before Year-End

Closing the sale of your business is an emotional and financial milestone. However, the timing of that closing—specifically whether it happens before or after the December 31st deadline—can have a massive impact on your "net-to-seller" proceeds. In the current 2025–2026 tax landscape, understanding how the IRS and state authorities view your transaction is essential to avoiding costly surprises.

Strategic tax planning at year-end isn't just about the rate you pay; it’s about choosing the right year to pay it and structuring the deal to protect your hard-earned equity.

Asset Sale vs. Stock Sale: The Foundation of Your Tax Bill

The way your deal is structured determines whether you pay the favorable long-term capital gains rate or the much higher ordinary income tax rate.

• Stock Sales: Generally preferred by sellers. In a stock sale, you are selling your ownership interest in the entity. Most of the proceeds are typically taxed at long-term capital gains rates (15% or 20% at the federal level, depending on your income).
• Asset Sales: Generally preferred by buyers for the "step-up" in basis. For sellers, however, this can be a tax minefield. The purchase price is allocated across different asset classes (equipment, inventory, goodwill). While goodwill is taxed at capital gains rates, other assets may trigger ordinary income tax.

The "Depreciation Recapture" Trap

One of the most common tax traps in a year-end asset sale is depreciation recapture. If you have written off the cost of machinery, vehicles, or equipment in previous years to lower your tax bill, the IRS "recaptures" that value when you sell those assets.

Instead of the lower capital gains rate, this portion of your profit is taxed as ordinary income, which can reach as high as 37%. If you are selling a capital-intensive business, this single factor can significantly reduce your take-home pay.

Timing Your Exit: Should You Close in 2025 or 2026?

With the turn of the year approaching, you must decide which tax year should absorb the gain.

The Case for 2025:

• Offsetting Losses: If your business (or your personal portfolio) had a difficult year with significant capital losses, closing before December 31 allows you to use those losses to offset the gains from your sale.
• Current Law Certainty: While the One Big Beautiful Bill Act (OBBBA) passed in July 2025 stabilized many tax provisions, closing in the current year eliminates the risk of unexpected legislative shifts in the new year.

The Case for 2026:

• Inflation-Adjusted Brackets: For 2026, the income thresholds for the 20% capital gains bracket have increased. For example, a single filer can earn up to $545,500 in 2026 before hitting the top 20% rate, compared to $533,400 in 2025.
• Lowering Your Effective Rate: If you expect your other income sources to be lower in 2026, deferring the sale could keep you in a lower overall tax bracket.

Strategic Deferral: The Installment Sale

If you want to close the deal now but avoid a massive tax hit in a single year, an installment sale is a powerful tool. By receiving a portion of the purchase price over several years, you only pay taxes on the gain as you receive the cash.

This strategy can help you:

1. Stay in a Lower Bracket: Spread the income so you don't trigger the top 20% capital gains rate or the 3.8% Net Investment Income Tax (NIIT).
2. Defer Payments: Push a significant portion of the tax liability into future years, allowing you to earn interest on the "tax money" in the meantime.

State-Level Tax Considerations

Don't forget the state's share. Several states are seeing tax rate changes effective January 1, 2026. For example, states like Georgia, Kentucky, and North Carolina have scheduled rate reductions for the new year. If your business is located in one of these jurisdictions, waiting just a few days to close in January could save you thousands in state income taxes.

Conclusion

A year-end business sale is a race against the clock, but speed should never come at the expense of strategy. By working with your M&A advisor and tax professional to analyze the asset allocation, depreciation recapture, and the benefits of 2025 vs. 2026 thresholds, you can ensure your "victory lap" isn't cut short by a surprise tax bill.