Installment Sale of a Business

§ 453 · reviewed September 7, 2026

Shows the tax each year when a business is sold for a down payment and a note, and how much tax that pushes past the year of sale. About

In plain words. When a buyer pays over time, the seller can report the profit as the money comes in instead of all at once. Each payment of principal carries the same share of profit. Two things do not wait. Depreciation the seller claimed on equipment or buildings is taxed as ordinary income in the year of sale no matter how little cash arrived, and the interest on the note is taxed each year as it is paid. This tool takes the price, the basis, the down payment, the note terms, and the rates, and lays out the payments, the gain, and the tax year by year.

Why it matters. An owner weighing a cash offer against a higher price paid over five years wants to know what the tax looks like in each year, and how much of the gain is really deferred. The recapture surprise, a large tax bill in a year with a small down payment, is the one to see before the letter of intent is signed.

An example. A business sold for $2,000,000 with a $500,000 basis and $100,000 of depreciation recapture, $400,000 down and the rest over four years at 6 percent, at a 20 percent gains rate and a 37 percent ordinary rate: 70 cents of every principal dollar is gain, the tax in the year of sale is $93,000 instead of $317,000 for a cash sale, and $224,000 of tax moves into the four later years.

Where it stops. It uses flat rates you choose, so it does not show a lower bracket from spreading the gain. It leaves out debt the buyer takes over, the interest charge on notes over $5 million, a related-party buyer, state tax, and the risk that the buyer stops paying. Everything it leaves out.

Sale price

The total the buyer will pay, down payment and note together, before selling costs.

Your basis in what is sold

What the assets cost you, less the depreciation you have taken. Your CPA's depreciation schedule has it.

Down payment at closing

Cash you receive in the year of the sale. The rest is the note.

Depreciation recapture taxed as ordinary income

Depreciation taken on equipment and vehicles, and any depreciation on buildings beyond straight line. It is taxed in the year of sale no matter how much cash comes in.

Years the note runs after the sale

The note is paid in equal yearly amounts of principal, starting the year after the sale.

Interest rate on the note

Interest is paid each year on what is still owed. It is taxed as ordinary income.

Your capital gains rate

The federal rate on long-term gains at your income, 15 or 20 percent for most sellers.

Your ordinary income rate

The federal rate on your last dollar of ordinary income. It applies to the recapture and the interest.

Would the 3.8% investment income surtax apply?

NoYes, my income is over the surtax threshold

It usually reaches the interest on the note. It reaches the gain when you did not run the business day to day.

Tax pushed past the year of sale

$224,000

You would owe $93,000 in the year of the sale instead of $317,000 for an all-cash sale. Each dollar of principal the buyer pays carries 70% of gain, so the tax follows the payments over the next 4 years. The $100,000 of depreciation recapture does not wait and is taxed in the year of sale.

Gain in each dollar of principal: 70%; $1,400,000 of gain spread over a $2,000,000 contract price
Total federal tax over the life of the note: $405,800; $317,000 on the sale and $88,800 on $240,000 of interest
Tax on the recapture in the year of sale: $37,000; At 37%, due whatever the down payment

Principal, gain, recapture, interest, and tax for each year
Year	Principal received	Gain taxed	Recapture	Interest	Federal tax
1	$400,000	$280,000	$100,000	0	$93,000
2	$400,000	$280,000	0	$96,000	$91,520
3	$400,000	$280,000	0	$72,000	$82,640
4	$400,000	$280,000	0	$48,000	$73,760
5	$400,000	$280,000	0	$24,000	$64,880
Total	$2,000,000	$1,400,000	$100,000	$240,000	$405,800

At flat rates, spreading the sale does not lower the tax on the gain. It moves the tax to the years the money arrives. The benefit is the use of that money in the meantime, and often a lower bracket in each year than one large year would reach, which the flat rates here do not show. The costs are the interest income, which is taxed as ordinary income, and the buyer's credit. If the buyer stops paying, you have the business back and the tax already paid.

This follows the federal installment sale rules, with the depreciation recapture taxed in the year of sale and each principal payment carrying the same share of gain. It assumes no debt taken over by the buyer, equal yearly principal payments starting the year after the sale, the rates you chose for every year, and interest at least as high as the law requires. It leaves out the interest charge on notes over $5 million, a related-party buyer, an election out of the method, state tax, and the seller's risk that the buyer does not pay. The sale is reported on Form 6252. Educational, not advice.

This is a simplified model, not your actual tax return or plan. It only knows what you type in, leaves out rules that may apply to you, and cannot weigh the other facts and trade-offs a real decision depends on. Before you act, talk with a professional who knows your whole situation.

Educational only, not investment, tax, or legal advice. Results are hypothetical estimates that vary with each use and over time and are not guaranteed accurate or complete. Using this tool creates no client relationship with Considerate Capital, and the site that linked here is not affiliated with it. By using it you agree to the tool terms.