StructuredSales.org
StructuredSales.org
Selling a business in California stacks two taxes on one closing. Federal long-term rates are 0, 15, or 20 percent, plus a 3.8 percent net investment income tax. California has no lower capital-gains rate. The Franchise Tax Board taxes the gain as ordinary income, and the top marginal rate is 13.3 percent once the extra 1 percent over $1 million is included. A lump-sum sale of a private company — a manufacturer, a distributor, a contractor, a tech-services firm, a restaurant group — runs most of that gain through the top brackets in a single year.
A structured installment sale under IRC §453 spreads eligible gain across the years payments arrive. It does not erase the tax, and the IRS has not approved a product by that name. It is a timing rule. Inventory, receivables, and depreciation recapture stay in the year of sale. The California state guide covers the statewide brackets. Capital gains tax by state lists the other states. This article stays on the operating company.
Check these before you use them. Brackets are indexed. The $1 million surcharge is not. Figures are from FTB's 2026 indexing notice, the 2026 Form 540-ES instructions, and IRS Revenue Procedure 2025-32. Confirm them on ftb.ca.gov and irs.gov. This is not a tax computation.
| Item | Figure we checked |
|---|---|
| California capital gains preference | None. Taxed as ordinary income. |
| Top regular California rate | 12.3%. On the 2026 joint schedule, that bracket starts above $1,536,426. Single filers reach it above $768,213. |
| Extra 1% over $1 million | Behavioral Health Services Tax, the tax previously called the Mental Health Services Tax. One threshold of $1 million on the return. It does not double on a joint return. |
| Combined top California marginal rate | 13.3% (12.3% + 1%). |
| 2026 joint 9.3% band | Taxable income over $150,394 and up to $768,218. The 10.3% band starts above that. |
| Federal long-term capital gain, 2026 | 20% above taxable income of $613,700 (joint) or $545,500 (single). 15% below those amounts, down to the 0% band. |
| Net investment income tax | 3.8% of the lesser of net investment income or the amount MAGI exceeds $250,000 (joint) or $200,000 (single). Those thresholds are not indexed. |
Under §453 you recognize gain as you receive principal, in proportion to profit. Sell for $4 million with a $400,000 basis and the gain is $3.6 million, a 90 percent gross-profit percentage. Each $400,000 of principal carries $360,000 of gain. Interest is ordinary income when you receive it. It is not part of that percentage.
In a structured sale, the payment right is assigned before you can collect the buyer's cash, and a life-insurer annuity funds the schedule. You report gain as payments arrive. The buyer is no longer the credit risk, and you cannot call the money early. How the assignment works and the §453 walk-through cover the documents. California uses the same timing on Form FTB 3805E. Deferral is not forgiveness.
Buyers of a California S corporation or LLC usually want the assets, or a §338(h)(10) election taxed as an asset sale, because they want a new basis. A plain stock sale is more often capital gain to the shareholder. The business-sale strategy guide compares that choice. Installment eligibility follows the asset class, not the headline on the purchase agreement.
| Piece of the price | What can be spread |
|---|---|
| Inventory and dealer property | Not eligible under §453. |
| Cash-method receivables | Ordinary income as collected, not a goodwill-style deferral. |
| Depreciated equipment | §1245 recapture in the year of sale under §453(i), even with no payment. FTB 3805E says the same for §§1250, 179, and 291. |
| Seller noncompete | Often ordinary. The allocation is negotiated. |
| Goodwill | Capital gain that can be spread if the sale qualifies and the holding period is met. |
| Private-company stock | Often eligible. A §338(h)(10) election or a partnership-interest sale can pull inventory and receivables back into ordinary income. |
A shop or distributor can therefore owe ordinary tax in the year of sale that a goodwill-heavy firm does not. See the HVAC guide for equipment, and the medical, dental, and law and CPA notes for practices. Section 1031 does not fix this. It covers real property, not stock or goodwill.
Illustration only — not your return. A married California couple sells private-company stock for $4 million. Basis is $400,000, so the long-term gain is $3.6 million. They have $150,000 of wages and no other investment income. No deductions, credits, or interest are included. Interest on a real annuity would be ordinary income on top.
Using the 90 percent gross profit above, ten principal payments of $400,000 recognize about $360,000 of gain a year. The $4 million face amount is under the $5 million line. These columns are a stock sale, so they include no recapture. An asset sale would add ordinary tax in the year of sale.
| Lump-sum close | Principal over 10 years | |
|---|---|---|
| Federal tax on the long-term gain | about $700,000 | about $540,000 |
| 3.8% net investment income tax | about $137,000 | about $99,000 |
| California tax on the gain | about $440,000 | about $335,000 |
| Combined tax on the gain | about $1.28 million | about $970,000 |
The gap is about $300,000, and only on these assumptions. The lump sum is mostly above the 20 percent federal line, with California dollars over $1 million at 13.3 percent. Spread out, income near $510,000 stays in the 15 percent federal band and California's 9.3 percent band, under the surcharge. The 3.8 percent tax does not disappear: wages plus the annual gain still clear $250,000. Other income of $800,000 would wipe out the bracket drop. So would a closing that has to pay off the bank in full.
Section 453A charges interest on deferred tax when installment obligations from the year's sales, still open at year-end, exceed $5 million. Pledging the note can also accelerate gain. This illustration is under the line. A larger group can cross it at once. California adopts the charge and, under Revenue and Taxation Code section 17560(e), uses the maximum rate in section 17041 rather than the federal maximum. The §453A calculator flags a face amount. The charge is a cost of waiting.
A cash closing puts the California capital gains tax on the sale of the business on one return. A seller-financed note is also an installment sale, except the buyer still owes you. The seller-financing comparison is the credit-risk difference. An earnout can be installment price, but an unfixed price is harder to report, and pay for future work can be wages.
A deferred sales trust is less settled than §453. A Delaware statutory trust holds replacement real estate, usually in a 1031, and does not defer stock or goodwill. See the strategy comparison, the deferred-sales-trust comparison, and the DST note. Section 1202 can exclude federal gain on qualifying small-business stock. Revenue and Taxation Code section 18152 says section 1202 does not apply, and the 2025 Schedule CA (540) instructions still list sections 1202 and 1045. FTB Publication 1001 says California does not conform to opportunity-zone sections 1400Z-1 and 1400Z-2. A federal exclusion can leave a California bill. Check current conformity before you rely on either.
People asking how to defer capital gains selling a business in California sometimes mean a move. FTB Publication 1100 is narrower than that hope. In its stock example, you sell while a resident and later move to Florida: California still taxes the gain portion, because of where you lived at the sale. Interest received as a nonresident is not taxed by California in that example. Gain on California real property stays California-source after you leave; interest again follows the example the other way. Gain on land outside California, collected after you leave, is not taxed by California in the publication's example. A California building in the deal can also bring withholding on later principal under Publication 1016. That withholding is a prepayment, not the tax itself.
An asset sale matches none of those examples cleanly. Equipment is tangible. Goodwill is intangible, and the intangible example is stock. Do not run every allocation line through the stock example. Moving before closing is a residency question — where you actually live — and it needs a California tax lawyer, not a paragraph.
It fits an owner who can live on a schedule, whose eligible gain is large next to inventory and recapture, and who would otherwise hit 13.3 percent and 20 percent in one year. Test §1202 on a private C corporation first, then the California tax that remains. Add up every obligation if several entities sell in the same year. It fits poorly when the price is mostly ordinary income, the bank must be paid at closing, or the payments are a salary for staying. The retirement-income article starts from the paycheck. The schedule has to be fixed before you can collect.
No. The Franchise Tax Board taxes capital gains as ordinary income. The top regular rate is 12.3 percent, plus a 1 percent Behavioral Health Services Tax — formerly the Mental Health Services Tax — on taxable income over $1 million. Together that is 13.3 percent, before federal long-term rates and the 3.8 percent net investment income tax.
Not as a rule. FTB Publication 1100 still taxes the gain on stock you sold while a resident, and it still taxes gain on California real property. Interest received after you leave is treated differently in those examples. Goodwill and equipment in an asset sale are not the same as the stock example. A move before closing is a residency question. Do not plan either from this article.
Inventory and dealer dispositions are outside the installment method. Depreciation recapture is recognized in the year of sale under section 453(i), which FTB Form 3805E follows. Cash-method receivables and many noncompete payments are ordinary income. Goodwill is the piece that can be spread when the rest of the sale qualifies.
Answer a few questions about the deal. You will get an eligibility read on a structured installment sale — educational, not a tax opinion.
Take the eligibility quiz →