Selling a Business: Tax Strategies for Owners Planning an Exit

Business Exit Tax Planning — Minimizing the Tax Impact When Selling Your Company

What Are the Tax Strategies for Selling a Business?

Quick Answer: The tax on selling a business is set by four things: whether the deal is an asset sale or a stock sale, what entity sold the assets, how long the stock was held, and where the seller lives. The strategies that change the number are the Section 1202 qualified small business stock exclusion, installment reporting, a charitable remainder trust, a sale to an employee stock ownership plan, and an opportunity-zone deferral. Almost all of them have to be in place before a letter of intent is signed.

That last point is the one that costs money. An exclusion with a three-year holding period cannot be created in the month of closing, and a corporation cannot be restructured once a buyer has been identified without the restructuring itself being examined. The useful question is not which strategy ranks highest but which ones are still open on your timeline. This page sits under our tax planning for business owners pillar and covers the exit layer of it; the entity layer that feeds it is on S corp vs C corp.

It attaches no percentage to what exit planning saves and no dollar range to what a seller keeps. Figures of that kind circulate widely, we could not source one, and so this page publishes none. Every rate, cap and deadline below is stated for the 2026 tax year with the statute or IRS source named beside it, so you can run your own numbers.

A bird gliding over a fog-covered coastline, seen from the top of a steep, scrub-covered cliff

How Much Tax Do You Actually Pay When You Sell a Business?

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The headline rate applies to gain, not to proceeds. A seller with a $10 million price and a $2 million basis has an $8 million gain, and the federal rates below apply to that $8 million. Long-term capital gain on assets held more than one year is taxed at 0%, 15% or 20% under IRC Section 1(h), and gain above the thresholds also carries the 3.8% net investment income tax under IRC Section 1411. A top-bracket seller therefore pays 23.8% federal on ordinary long-term gain. Not all of a business sale is long-term gain, which is where the real variance lives.

2026 federal component	Rate	Applies to	Source
Long-term capital gain	0% / 15% / 20%	The 20% rate begins at $545,500 of taxable income for single filers and $613,700 for married filing jointly. The 15% rate begins at $49,450 and $98,900.	IRC Section 1(h); Rev. Proc. 2025-32
Net investment income tax	3.8%	Modified AGI above $200,000 single or $250,000 married filing jointly. These thresholds are fixed in statute and are not indexed for inflation.	IRC Section 1411; IRS
Ordinary income	Up to 37%	Consulting agreements, non-compete payments, earn-outs treated as compensation, and depreciation recapture on personal property. The 37% bracket begins at $640,600 single and $768,700 married filing jointly.	IRS, Rev. Proc. 2025-32
Unrecaptured Section 1250 gain	Up to 25%	Depreciation previously claimed on real property included in the sale.	IRC Section 1(h)(1)(E)
Corporate income tax	21%	A C corporation selling its assets pays this at the entity level before anything reaches the shareholder.	IRC Section 11(b)
Section 1202 gain not excluded	28%	Where the exclusion is partial, the included portion is 28-percent rate gain rather than 20% gain — a point that is easy to miss in the new three-year and four-year tiers.	IRC Section 1(h)(4) and (h)(7)

Rates are stated for the 2026 tax year. The mix of these components, not any single rate, is what an exit plan is actually managing.

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Which States Tax a Business Sale, and at What Rate?

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State residence at the time of sale is often the second-largest variable after deal structure, and the map is not what most sellers assume. Nine states levy no individual income tax at all, but one of them taxes long-term capital gains through a separate excise, and two states widely described as low-rate have cut their rates since the figures most sale calculators use were written. State tax is also not a simple add-on: it interacts with the federal deduction limits and, for a multi-state business, with how the gain is sourced.

State	2026 treatment of a long-term gain	Note
Florida, Texas, Nevada, Wyoming, South Dakota	No individual income tax and no separate capital gains tax.	Residence is tested against each state's own rules; establishing it shortly before a closing invites a residency audit from the departing state.
Washington	7% capital gains excise on long-term gains above an indexed standard deduction ($278,000 for 2025), and 9.9% on the portion above $1 million.	The 9.9% tier was added by ESSB 5813 effective for tax year 2025. Real estate is exempt, and there is a deduction for the sale of all or substantially all of a qualified family-owned small business. Washington Department of Revenue
Arizona	2.5% flat individual income tax.	Arizona has been a single 2.5% rate since tax year 2023. Guides written before that quote the older graduated brackets.
Colorado	4.4% flat individual income tax.	Reduced from 4.55% by Proposition 121 effective tax year 2022.
New York	Graduated to 10.9%.	The 10.9% top bracket applies above $25 million of income; a gain in the $5 million to $25 million range falls in the 10.3% bracket. New York City residents add a city income tax on top. New York State Department of Taxation and Finance
California	Graduated to 13.3%.	12.3% top bracket plus the 1% surcharge on income above $1 million. California conforms to neither the Section 1202 exclusion nor opportunity-zone deferral, so a California seller can owe state tax on gain that is federally excluded.

State treatment changes more often than federal treatment and several states do not conform to the federal exclusions described below. Confirm the current rule for your state of residence, and for every state the business has nexus in, before modelling a number.

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Does an Asset Sale or a Stock Sale Cost the Seller More?

Usually the asset sale, and for a C corporation the gap is structural rather than marginal. In a stock sale the shareholder sells shares and reports one long-term capital gain. In an asset sale the company sells its assets, and what happens next depends entirely on whether the company is a pass-through or a C corporation.

The common shorthand that "C corporation sales are double taxed" is only half right, and the half it gets wrong matters. A C corporation stock sale is taxed once, at the shareholder level, exactly like an S corporation stock sale. It is the asset sale that is taxed twice: the corporation pays 21% under IRC Section 11(b) on the gain, and the shareholder pays again when the after-tax proceeds are distributed in liquidation. On a $8 million gain that is roughly $1.68 million at the corporate level, leaving about $6.32 million to distribute, on which a top-bracket shareholder pays about 23.8% — a combined effective rate near 39.8%. The same gain in a pass-through, sold as assets or stock, is taxed once.

Buyers usually prefer an asset purchase because it produces a stepped-up basis to depreciate and leaves unknown liabilities behind, so the structure is negotiated rather than chosen. Where a C corporation must sell assets, the two mitigations worth pricing are an allocation to personal goodwill and, in the right facts, an ESOP.

Personal goodwill is the doctrine from Martin Ice Cream Co. v. Commissioner, 110 T.C. 189 (1998), where the Tax Court held that relationships an individual built personally, and never assigned to the corporation, were the individual's asset and not the company's. Proceeds allocated to that asset are paid to the shareholder directly and taxed once. Bross Trucking, Inc. v. Commissioner, T.C. Memo. 2014-107, applied the same reasoning and is the case most often cited for its limits. The doctrine is fact-specific and turns on a point most owners get wrong in advance: an employment agreement or a non-compete that assigns the relationships to the company generally defeats it. Read those documents years before the sale, not during diligence.

A single aircraft crossing an overcast grey sky above the spire of a Gothic clock tower

Asset Sale vs Stock Sale: Who Bears What

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Question	Asset sale	Stock sale
Who is the seller	The company sells its assets; the entity survives holding cash.	The owners sell their equity; the entity transfers intact.
Pass-through seller (S corp, LLC, partnership)	One level of tax. Gain is characterised asset by asset, so equipment recapture is ordinary income and goodwill is capital gain.	One level of tax, almost entirely long-term capital gain.
C corporation seller	Two levels. 21% at the corporation, then tax again on the liquidating distribution — roughly 39.8% combined for a top-bracket shareholder.	One level, at the shareholder. This is also the only route to a Section 1202 exclusion.
Buyer's basis	Stepped up to purchase price, and amortisable. Buyers pay for this.	Carryover basis inside the company. Buyers discount for it.
Where the negotiation actually happens	The purchase price allocation on Form 8594, which fixes each side's character.	Whether a Section 338(h)(10) or 336(e) election recasts the deal as an asset sale for tax purposes.

A deal described as a stock sale can still be taxed as an asset sale if the parties make a Section 338(h)(10) or 336(e) election. Confirm which one the agreement contemplates before assuming the treatment.

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How Does the QSBS Exclusion Work After the 2025 Law Change?

Section 1202 now runs on two tracks, and which one applies depends on a single date: when the stock was acquired. Section 70431 of the One Big Beautiful Bill Act (Public Law 119-21, enacted July 4, 2025) rewrote the exclusion for stock acquired after July 4, 2025, and left stock acquired on or before that date under the rules it was issued under. A page that describes only one track will mislead roughly half of its readers, so both are set out below.

Qualified small business stock is C corporation stock acquired at original issue in a company whose aggregate gross assets did not exceed the applicable ceiling at issuance, where at least 80% of assets are used in the active conduct of a qualified trade or business (IRC Section 1202). The exclusion is per shareholder and per issuing company, so shareholders in the same company each have their own cap.

The excluded-industry list is longer than most summaries admit, and it is where professional-services businesses fail. IRC Section 1202(e)(3) excludes any trade or business performing services in health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services or brokerage services; any business whose principal asset is the reputation or skill of one or more employees; banking, insurance, financing, leasing and investing; farming; extraction businesses under IRC Sections 613 and 613A; and hotels, motels and restaurants. Summaries that list only "financial services, farming, mining and hospitality" omit the professional-services category that disqualifies the largest number of founder-owned firms.

The crest of a sand dune divided into one sunlit slope and one shadowed slope under a clear blue sky

Section 1202 Before and After July 4, 2025

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Element	Stock acquired on or before July 4, 2025	Stock acquired after July 4, 2025
Holding period and exclusion	All or nothing. 100% exclusion at more than five years for stock acquired after September 27, 2010; nothing before five years.	Tiered: 50% at three years, 75% at four years, 100% at five years.
Per-issuer cap	Greater of $10 million or 10 times aggregate adjusted basis.	Greater of $15 million or 10 times aggregate adjusted basis. The $15 million figure is indexed for inflation beginning in 2027.
Company size ceiling at issuance	Aggregate gross assets of $50 million or less.	Aggregate gross assets of $75 million or less, also indexed from 2027.
Rate on the portion not excluded	Gain above the cap is ordinary long-term capital gain (up to 20%, plus 3.8% NIIT).	At the 50% and 75% tiers, the included portion is 28-percent rate gain under IRC Section 1(h)(4), plus 3.8% NIIT — about 31.8%, not 23.8%. Gain above the cap remains 20% gain.
Alternative minimum tax	No preference on the 100% exclusion for post-September 2010 stock.	No AMT preference at any of the three tiers.
Statutory basis	IRC Section 1202 as in effect before amendment.	IRC Section 1202 as amended by OBBBA Section 70431, Public Law 119-21.

Worked illustration, on the post-2025 track. A founder who acquired qualifying stock on August 1, 2025 and sells five years later for $16 million against a $1 million basis has a $15 million gain. At a five-year hold the exclusion is 100% up to the greater of $15 million or 10 times basis, so the whole gain is excluded and the federal tax on it is nil. Selling the same stock at three years and six months instead gives a 50% exclusion: $7.5 million excluded, $7.5 million included as 28-percent rate gain plus the 3.8% NIIT, about $2.385 million. This is arithmetic applied to published statutory rates for illustration. It is not a Dew Wealth client result, and no client result is described or implied. Individual outcomes depend on basis, state law, eligibility and the structure of the transaction.

Two mechanics that change the planning, and one that gets misused. Under IRC Section 1045 a holder who has owned QSBS for more than six months can roll the proceeds into replacement QSBS within 60 days and defer the gain, tacking the holding period — the standard answer when a sale lands short of a tier. Under IRC Section 1202(h) QSBS transferred by gift keeps its character and holding period in the recipient's hands, which is the basis of the "stacking" planning in which shares are given to family members or non-grantor trusts before a sale so that more than one per-issuer cap applies. That planning is real, but it is estate planning with tax consequences, and its integrity depends on the transfers being complete, valued and made well before a buyer is identified. Read it alongside business succession planning rather than as a closing-week manoeuvre.

Conversion timing is the trap. Where an LLC or S corporation converts to a C corporation, the Section 1202 holding period starts at conversion, not at founding, and the gross-assets test is applied at issuance. A conversion executed once a sale is in view generally arrives too late for any tier.

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Can an Installment Sale Spread the Tax Over Several Years?

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Yes, and it is the most commonly available deferral in a mid-market deal, because it needs no advance structuring. Under IRC Section 453 a seller who receives at least one payment after the year of sale reports gain as payments come in, using a gross profit ratio, instead of recognising all of it at closing. Where seller financing or an earn-out is already part of the deal, installment reporting is the default unless the seller elects out.

The reasons to consider it are rate management and cash flow: spreading a large gain across several years can keep more of it below the 20% capital gains threshold and below the net investment income tax thresholds, and it defers tax to the years the cash actually arrives. The reasons not to are equally concrete.

Limit	What it means	Source
Depreciation recapture is not deferrable	Recapture under IRC Sections 1245 and 1250 is recognised in full in the year of sale, even though the cash has not been received. A heavily depreciated asset base can produce a tax bill larger than the first year's proceeds.	IRC Section 453(i)
Interest charge on large deferrals	Where the face amount of installment obligations arising in the year and outstanding at year end exceeds $5,000,000, the seller pays an annual interest charge on the deferred tax at the Section 6621(a)(2) underpayment rate. The $5,000,000 threshold is not indexed.	IRC Section 453A(b) and (c)
Credit risk sits with the seller	Deferred consideration is an unsecured claim on the buyer's future performance. A default does not undo the tax already paid on earlier payments.	Commercial, not statutory
Rates can move	Deferring gain into later years defers it into whatever the law is then. This is a genuine two-way risk, not a one-way benefit.	Commercial, not statutory
Not available for publicly traded stock	Installment reporting is unavailable for sales of stock or securities traded on an established market.	IRC Section 453(k)

Because installment treatment applies by default where deferred payments exist, the decision worth making deliberately is whether to elect out of it — which can be the right answer when rates are expected to rise or when the Section 453A interest charge outweighs the deferral.

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How Does a Charitable Remainder Trust Change the Math on a Sale?

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A charitable remainder trust is tax-exempt under IRC Section 664, so it can sell a contributed interest without recognising capital gain at the trust level. An owner who contributes part of the business to a CRT before a sale converts that portion into a stream of payments to themselves and, at the end of the term, a gift to charity. The donor also takes an income tax deduction under IRC Section 170 for the present value of the charity's remainder interest, calculated using the IRS Section 7520 rate published monthly.

Two structures exist. A charitable remainder annuity trust pays a fixed dollar amount set at inception; a charitable remainder unitrust pays a percentage of trust value recalculated each year. Both must pay between 5% and 50% annually, and the charity's remainder interest must be worth at least 10% of the value contributed. Distributions carry out income under the four-tier ordering rule of IRC Section 664(b), so the gain the trust avoided at sale is taxed to the recipient as it is paid out. The benefit is deferral and spreading, plus a deduction and a charitable result — not permanent elimination. Our wiki entry on the charitable remainder trust sets out the mechanics in more detail.

The transfer is irrevocable and the IRS scrutinises pre-sale contributions closely. Where a sale is already negotiated and the outcome effectively certain, the assignment-of-income doctrine can tax the gain to the donor anyway. Timing and documentation are the whole of it, and the structure needs counsel rather than a template.

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What Are the Tax Benefits of Selling to an ESOP?

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An employee stock ownership plan is the one exit route with a statutory deferral attached to the seller and a tax exemption attached to the company. Under IRC Section 1042 a shareholder who sells C corporation stock to an ESOP that ends up holding at least 30% of the company, and who reinvests the proceeds in qualified replacement property within a window running from three months before to twelve months after the sale, can elect to defer the gain. The stock must have been held for at least three years.

Separately, an S corporation's income allocable to an ESOP is not subject to federal income tax, so a 100% ESOP-owned S corporation pays no federal income tax on its earnings. That is a company-level benefit rather than a seller-level one, and it is the reason ESOPs are often described as producing two advantages at once.

Section 114 of the SECURE 2.0 Act extends a Section 1042 election to sales of S corporation stock for sales occurring after December 31, 2027, but limits the deferral to 10% of the gain rather than the full amount available on C corporation stock. For an S corporation owner weighing an ESOP, that date and that 10% ceiling are the two facts that change the arithmetic.

An ESOP is a retirement plan with fiduciary obligations, an annual independent valuation requirement and real ongoing cost, and the price it pays is fair market value rather than a strategic premium. It suits owners with steady cash flow who value continuity. It is not a way to sell high.

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Are Opportunity Zones Still a Deferral Option After 2025?

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Yes, and the regime that most published guidance describes has been replaced. The original opportunity-zone rules in IRC Section 1400Z-2 deferred an invested gain only until December 31, 2026, a fixed date that was approaching expiry. The One Big Beautiful Bill Act made the programme permanent and replaced the fixed date with a rolling five-year deferral for investments made after December 31, 2026. New zone designations take effect January 1, 2027, on a rolling ten-year cycle.

Under the new structure an investor who realises a capital gain from any source, including a business sale, can invest that gain in a qualified opportunity fund within 180 days, defer it for five years, and receive a 10% step-up in basis at the five-year mark. Investments in the new class of qualified rural opportunity funds receive a 30% step-up instead. Holding the fund interest for at least ten years continues to exclude appreciation on the fund investment itself.

Any opportunity-zone material written before July 2025 that describes a December 31, 2026 deferral deadline is describing superseded law. Confirm the designation status of a specific tract against the current list before relying on it, and note that several states, California among them, do not conform to the federal deferral.

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When Does Each Strategy Have to Be in Place?

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This is the table the rest of the page exists to produce. Exit tax planning is not a menu of strategies, it is a calendar. Most of what follows cannot be created once a letter of intent is signed, and a few items cannot be created once a buyer has been identified at all, because the transaction is then treated as effectively certain.

Strategy	Latest realistic point to start	What closes the window
Section 1202, 100% exclusion	Five years before closing.	The holding period runs from the date the C corporation stock is issued. Conversion from an LLC or S corporation restarts it.
Section 1202, 50% or 75% tier	Three to four years before closing, and only for stock acquired after July 4, 2025.	Same holding-period rule; the tiers simply start earlier.
QSBS gifting to multiply the cap	Well before a buyer is identified.	Transfers made once a sale is effectively certain invite an assignment-of-income challenge, and valuation is harder to defend.
Entity conversion or restructuring	Years before, and never during diligence.	A restructuring executed with a specific buyer in view is examined on its business purpose. An S election also carries a five-year built-in gains period.
Personal goodwill allocation	Before employment agreements and non-competes are signed — often years earlier — and then priced during negotiation.	An agreement assigning the relationships to the company generally defeats the allocation.
Charitable remainder trust	Before the sale is negotiated to the point of certainty.	Assignment of income. A contribution made after terms are effectively agreed can be taxed to the donor.
Sale to an ESOP	Twelve to twenty-four months before, for feasibility, valuation and financing.	The Section 1042 election requires the stock to have been held three years and the ESOP to reach 30% ownership.
Installment reporting	At the deal table.	Applies by default where deferred payments exist; the deliberate decision is whether to elect out on the return.
Opportunity-zone deferral	Within 180 days after the gain is recognised.	The only strategy on this list that is still available after closing.
Changing state of residence	Well before, with genuine relocation.	The departing state audits residency changes made close to a liquidity event.

Our month-by-month tax planning checklist sets out the recurring elections and deadlines that run alongside this, and the valuation and readiness side of an exit is covered under business exit planning.

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Business Exit Tax Questions

How much tax do you pay when you sell a business?

It depends on gain rather than price, and on structure rather than size. A top-bracket seller of pass-through equity pays 23.8% federal on long-term gain: 20% capital gains plus the 3.8% net investment income tax. A C corporation selling assets is taxed twice, roughly 39.8% combined. State tax is added on top and ranges from nothing to 13.3%. Parts of a deal treated as compensation or recapture are taxed at ordinary rates up to 37%.

How can you avoid capital gains tax on a business sale?

Complete elimination is rare and statutory. The Section 1202 exclusion is the only provision that permanently removes the gain, and it requires C corporation stock held for at least three years in a company that met the gross-assets test at issuance. Everything else defers rather than eliminates: installment reporting, a Section 1042 rollover into an ESOP, an opportunity-zone investment, or a charitable remainder trust. Deferral and elimination are different outcomes and should be priced differently.

Does QSBS still exclude only $10 million?

Not for newer stock. For stock acquired after July 4, 2025 the per-issuer cap is the greater of $15 million or 10 times basis, indexed for inflation from 2027, and the company-size ceiling at issuance is $75 million. Stock acquired on or before that date keeps the original $10 million cap, $50 million ceiling and five-year cliff. Both tracks are live at once, so the acquisition date of each block of shares governs.

How long before a sale should tax planning start?

Long enough for the holding period you are relying on. A 100% Section 1202 exclusion needs five years from stock issuance and the partial tiers need three or four, so those decisions belong to the year the entity is formed or converted. Charitable and gifting structures need to be complete before a buyer is identified. Only the opportunity-zone deferral, at 180 days after the gain, remains available once the deal has closed.

Is an installment sale worth it when selling a business?

Sometimes, and it applies by default where deferred payments exist. It can keep gain below the 20% and net investment income tax thresholds and matches tax to cash received. Against that: depreciation recapture is taxed in full in the year of sale regardless, obligations above $5,000,000 outstanding at year end carry an annual interest charge under Section 453A, and the seller holds the buyer's credit risk. Electing out is a real option.

How do the wealthiest families
time a liquidity event?

They start the tax work while the exit is still hypothetical, because that is when the options still exist. Schedule an assessment and we will map your holding periods, entity history and residency against a realistic sale window, identify which of the strategies above are still open to you and which have already closed, and set the review cadence that keeps the open ones from closing unnoticed — coordinated with your CPA and transaction counsel by a Fractional Family Office^®.

Take control of your financial future. Use our free Wealth Waste Calculator^® to estimate what your current structure may be costing you each year.

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Page last updated: August 1, 2026

Disclosure

Dew Wealth Management, LLC ("Dew Wealth") is an SEC-registered investment adviser located in Scottsdale, Arizona. Registration does not imply a certain level of skill or training. The information provided in this material is for general informational and educational purposes only and should not be construed as personalized investment, tax, or legal advice. All investing involves risk, including the potential loss of principal.

This material contains the opinions of Dew Wealth, and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product.

References to "exit tax strategies," "billionaire models," "family office approaches," and other similar terms are general descriptions and are not guarantees of specific outcomes. Tax strategies that may be appropriate for one individual may not be appropriate for another, and all strategies are subject to changes in tax laws and regulations. Dew Wealth is not a law firm or accounting firm, and no portion of this content should be interpreted as legal, accounting, or tax advice.

Every rate, dollar limit, holding period, deadline, and statutory reference on this page is stated for the 2026 tax year and is drawn from the primary source cited beside it — principally the Internal Revenue Code sections named in the text, Rev. Proc. 2025-32, Public Law 119-21, the SECURE 2.0 Act, and the published guidance of the IRS and the Washington State Department of Revenue. The worked Section 1202 illustration is arithmetic applied to those published rates for the purpose of illustration; it is not the result of any Dew Wealth client, and no client result is described, promised, or implied anywhere on this page. Court decisions are cited so that readers may examine the holdings themselves; confirm each citation independently before relying on it. Tax law, IRS interpretation, filing dates, and inflation-adjusted amounts change. The tax treatment of a business sale also turns on state law, which varies and which in several states does not conform to the federal exclusions described here. Nothing on this page is an opinion on the tax treatment of any particular transaction, entity, or taxpayer.

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