Accounting Practice Sale Tax Calculator

Most practice deals pay part of the price after closing: a seller note, a look-back tied to collections, or an earnout. Under IRC §453 the capital gain is reported as principal arrives, each payment times the gross profit ratio. Two items cannot wait. Depreciation and amortization recapture is recognized in the year of sale whether or not cash arrives (§453(i)), and in a partnership-interest sale the part of the gain from receivables and recapture is ordinary under §751 and cannot use the installment method (IRS Publication 537). Covenant payments are ordinary income as they are received.

Retention-based payments make the deal a contingent payment sale under Treas. Reg. §15a.453-1(c). With a stated maximum price, basis is recovered over that maximum and the gross profit ratio is recomputed if the maximum is later reduced. When clients leave and the price drops, the decrease comes off goodwill first, then Class VI, V, and III, and each side files a supplemental Form 8594. In the default example, taking the expected $950,000 in one year would cost $163,335 of tax; spreading it over five tax years saves $31,918, because more of the gain stays below the 20% breakpoint and part of it lands in the 0% band.

Interest on a seller note is ordinary income and net investment income. A note whose stated rate is below the applicable federal rate, and deferred contingent payments without adequate interest, carry unstated interest under §483 or §1274 that converts part of the principal to interest. If more than $5 million of installment obligations is outstanding at year end, §453A adds an interest charge on the deferred tax. You can elect out of the installment method and report the whole gain in the year of sale; the calculator shows what that costs. To see the cash side of the same offer, run it through the accounting practice sale calculator.

A C corporation that sells its assets pays the 21% federal corporate tax, plus any state corporate tax, on the gain. The shareholder then pays capital gain on the liquidating distribution under §331, and that gain is net investment income. For the California example on this page ($800,000 asset sale, all cash, joint filers with $80,000 of other income), the corporate layer costs $221,630, total tax is $374,354 (46.8% of the price), and the owner keeps $425,646. The same sale by a sole proprietor would keep $592,925.

Personal goodwill is the established way around the first layer. In Martin Ice Cream Co. v. Commissioner, 110 T.C. 189 (1998), and Norwalk v. Commissioner, T.C. Memo. 1998-279, a case about a CPA firm, the Tax Court held that client relationships belonged to the individuals because no non-compete or employment agreement tied them to the corporation. In Howard v. United States, No. CV-08-365-RMP (E.D. Wash. 2010), aff'd, 448 F. App'x 752 (9th Cir. 2011), a dentist's non-compete with his own corporation made the goodwill corporate. In the California example, selling $600,000 of goodwill personally raises the net to $537,239, $111,593 more. The calculator treats that personal gain as net investment income, the conservative reading. The fact pattern and the drafting order are discussed in our CPA firm valuation multiples guide.

Timing assumption: the corporation sells and liquidates in the same year. Distributing installment notes to shareholders triggers the corporation's deferred gain under §453B(a), so the corporate tax falls in year 1, while §453(h) lets the shareholder report notes received in a liquidation completed within 12 months of adopting the plan as they are paid.

The 3.8% net investment income tax does not reach the gain of an owner who works in the practice. Treas. Reg. §1.1411-4(d)(4) excludes gain on property held in a non-passive trade or business, and accounting is a personal service activity, so material participation in any three earlier years keeps it non-passive (Reg. §1.469-5T(a)(6)). The exclusion is fixed in the year of sale and follows later installment payments. A partnership interest or S corporation stock gets the same result through a look-through to the entity's assets. C corporation stock does not, and note interest is investment income in every structure.

The §1202 exclusion for qualified small business stock is not available: §1202(e)(3)(A) excludes any business performing services in accounting. An S corporation that converted from C status within the last five years pays the 21% built-in gains tax under §1374 on gain that existed at conversion, which for a practice is mostly self-created goodwill. The calculator flags that case without computing it. Sellers who would rather keep the client relationships and sell only the production work can compare this math with the hybrid roll-up structure.

Seven states have no tax on an individual's gain: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming. New Hampshire has no individual income tax, but its 7.5% Business Profits Tax reaches a proprietor's gain on selling business assets, goodwill included. Washington's capital gains tax (7%, plus 2.9% on gains over $1 million after the $278,000 standard deduction) reaches goodwill unless the sale qualifies for the family-owned small business deduction. Every other state taxes the gain, and most tax it exactly like wages. The exceptions that matter for a practice sale, verified September 2026:

Several breaks sellers ask about do not reach a 2026 practice sale: Iowa repealed its business-sale deduction from 2023 except for farm property, Louisiana repealed its deduction from 2025, Idaho's 60% deduction excludes intangibles, Colorado's subtraction now covers only farm land, and Arizona's 25% subtraction covers only assets acquired after 2011. Because the installment method moves gain into later years, timing is a state-tax lever too: Maryland's 2% applies only in years above $350,000 of AGI and Ohio's $250,000 deduction resets every year.

Rates are 2026 where enacted or published; California, Idaho, and Kansas use their 2025 schedules and Washington its 2025 deduction. The calculator assumes one state of residence in every payment year. Moving does not always help: our guide to selling a CPA practice in California explains why installment gain on goodwill sold while resident stays taxable there. Entity-level taxes are included for New Hampshire, Tennessee S corporations, California S corporations (1.5%), and Illinois partnerships and S corporations (1.5% replacement tax).