Small Business Sale Under $1M: Asset Allocation and Recapture Tax

At under $1M, focus on getting the purchase price allocation right on Form 8594. Depreciation recapture on equipment will trigger ordinary income tax.

Asset sales dominate at this size. Most buyers of sub-$1M businesses want to buy assets, not stock. That means you sell individual assets -- equipment, inventory, customer lists, goodwill -- and each category triggers different tax treatment. Tangible assets you depreciated will generate ordinary income through depreciation recapture under Section 1245, not the lower capital gains rate.

Installment sales may not be worth the complexity. Section 453 lets you spread gain over years of payments, but with smaller deals the administrative burden of tracking installment income and interest often outweighs the deferral benefit, especially if you need the cash upfront.

Purchase price allocation is your lever. IRS Form 8594 requires both buyer and seller to report how the price was allocated across asset classes. The buyer wants more allocated to depreciable assets; you want more in goodwill (taxed at capital gains rates).

The tradeoff: Simpler deal structure means fewer planning levers, but also lower advisory costs. The key decision is getting the allocation right on Form 8594 -- that single negotiation point drives most of the tax outcome.