Ask a room of business owners what they’ll pay in tax when they sell and most will say “twenty percent.” That is the top federal capital gains rate, on one slice of one kind of sale. The real bill on a New York business sale is built in layers: federal capital gains, a possible 3.8% surtax, ordinary-income rates on parts of the price, New York’s income tax on top of all of it, and, for some companies, a second layer of corporate tax underneath. Which layers apply is decided by choices most owners make without knowing they’re making them.
How the tax on a sale stacks up
Every dollar of the price lands in one of these buckets. The rates are 2026 top rates.
| Layer | Top rate | When it applies |
|---|---|---|
| Federal long-term capital gain | 20% | Gain on stock or capital assets held more than a year. For married couples, 20% applies to taxable income above $613,700 in 2026. |
| Net investment income tax | 3.8% | Investment gain above $250,000 of income for married couples. Often not owed by owners who were active in an S corporation or partnership. |
| Depreciation recapture | 37% | The part of the gain on equipment that reflects depreciation already deducted. Taxed as ordinary income. |
| Gain from depreciation on buildings | 25% | Real estate the business owns, to the extent of past depreciation. |
| Ordinary-income pieces of the deal | 37% | Non-compete payments, consulting and employment agreements, and some inventory and receivables. |
| New York income tax | 10.9% | Residents, on all of it. Nonresidents, on the part New York treats as New York income. |
| Corporate tax | 21% federal, plus New York | Only C corporations, and only when the company itself sells its assets. |
The 3.8% that active owners can often avoid. The net investment income tax applies to investment gains. When an owner who materially participated in an S corporation or a partnership sells the interest, the gain is generally treated as if the business sold its operating assets, and the portion tied to an active business isn’t investment income at all. The tax code counts an owner as materially participating in any year if they did so in five of the previous ten, so an owner who stepped back recently may still qualify. Gain on C corporation stock is different: it is generally subject to the 3.8% no matter how hard the owner worked. On an $18 million gain, that’s $684,000.
New York’s share, and why it’s bigger than people expect
New York taxes capital gains exactly like wages. There is no separate, lower rate. In 2026, a married couple pays 9.65% on taxable income above $2,155,350, 10.3% above $5 million, and 10.9% above $25 million. Those top rates are scheduled to stay in place through 2032.
In a sale year, New York’s rate is effectively flat. Above $107,650 of New York income, the state starts taking back the benefit of its lower brackets. A large one-time gain pushes the whole year’s taxable income to a single flat rate: 9.65% for many seven-figure sales, 10.3% once New York income passes about $5.05 million, and 10.9% once it passes about $25 million. For a seller with an eight-figure year, the practical math is simple: multiply the whole gain by the rate you land in.
Rochester has no local income tax. New York City and Yonkers do. A Rochester owner avoids the city’s additional tax of up to 3.876% that a Manhattan owner would pay on the same sale, which is one small advantage of selling upstate.
Stock, assets, and the entity you chose decades ago
How the company is organized, and what the buyer actually buys, decides how many layers of tax apply and at what rates.
Check one New York form before anything else. New York doesn’t automatically follow a federal S election. A company needs its own New York S election, on Form CT-6 with every shareholder’s consent, or New York taxes it as a C corporation even while the IRS treats it as an S corporation. An owner who assumes otherwise can find a corporate-level New York tax on an asset sale they never planned for.
S corporation, stock sale
One layer of tax, mostly at capital gain rates. Often no 3.8% for an active owner. Buyers like it less, because they don’t get to depreciate the purchase price.
S corporation, asset sale
Still one layer, but recapture and ordinary-income pieces get taxed at up to 37%. If the company converted from a C corporation within the last five years, a 21% built-in gains tax can apply too.
Elections that make a stock sale an asset sale
Buyers often ask for a 338(h)(10) or 336(e) election, or a pre-closing reorganization, so they get the tax benefits of buying assets. The seller is taxed as if assets were sold. That cost is negotiable, and sellers often ask for a gross-up to cover it.
C corporation, stock sale
One layer: up to 23.8% federal plus New York. If the stock qualifies as QSBS, part or all of the federal gain may be excluded.
C corporation, asset sale
Two layers. The company pays 21% federal tax plus New York corporate tax on its gain, then you pay up to 23.8% plus New York when the cash comes out. Roughly 39.8% federal per dollar of gain before New York.
LLC or partnership interest
Capital gain on most of it, but the portion tied to receivables, inventory and depreciation recapture is taxed as ordinary income.
Personal goodwill: the C corporation owner’s escape hatch. Courts have recognized that goodwill built on an owner’s own relationships and skill can belong to the owner, not the corporation. In Martin Ice Cream, the owner’s personal relationships with supermarket chains were his to sell, so the company wasn’t taxed on them. In H&M, the court again found the goodwill was the owner’s. It fails when the owner has already tied those relationships to the company with an employment or non-compete agreement, as a dentist learned in Howard, and when the deal documents don’t support a genuinely separate sale. Done properly, it takes a valuation and its own purchase agreement, years before anyone signs.
More on how deal structure changes what you keep: asset sale or stock sale and QSBS and Section 1202.
The allocation fight nobody warns you about
In an asset sale, the buyer and seller split the price across seven classes of assets and both report the split to the IRS on Form 8594. Each class is taxed differently, and the two sides want opposite things.
| Where the price is allocated | Seller’s tax | What the buyer gets |
|---|---|---|
| Goodwill and going concern value | Capital gain, up to 20% | Deducted over 15 years |
| Equipment and vehicles | Ordinary income up to 37% on the recapture portion | Often deducted much faster, sometimes immediately |
| Inventory and receivables | Ordinary income | Recovered as they’re sold or collected |
| A non-compete agreement | Ordinary income, up to 37% | Deducted over 15 years, whatever the agreement’s length |
| A consulting or employment agreement | Ordinary income, plus payroll or self-employment tax | Deducted as paid |
Every dollar that moves out of goodwill can cost you up to 17 cents. That’s the gap between a 37% ordinary rate and a 20% capital gain rate. On a $20 million deal, a few million dollars of “allocation” is a six-figure number. Once you sign an allocation, courts rarely let you change your mind, so it gets negotiated with the price, not after it.
One fictional sale, five ways
A Rochester owner sells for $20 million. The tax basis is $2 million, so the gain is $18 million. To show scale, the table uses flat top rates and ignores lower brackets, deductions, fees and debt; real returns are more complicated. The asset-sale row assumes $3 million of equipment recapture and a $500,000 non-compete. The C corporation row assumes a 7.25% New York corporate rate and a full liquidation.
It assumes the owner lives in Rochester and the company has a New York S election in effect where it’s an S corporation. At $18 million of New York income, New York’s 10.3% rate applies to the whole gain.
| Structure | Federal | New York | Total tax | Left before fees and debt |
|---|---|---|---|---|
| S corporation stock, active owner | $3.60M | $1.85M | $5.45M | $14.55M |
| S corporation assets, active owner | $4.20M | $1.85M | $6.05M | $13.95M |
| S corporation stock, owner not active | $4.28M | $1.85M | $6.14M | $13.86M |
| C corporation stock | $4.28M | $1.85M | $6.14M | $13.86M |
| C corporation assets, then liquidation | $6.65M | $2.66M | $9.31M | $10.69M |
Same company, same price, same owner: $3.9 million apart. Nothing in the bottom row is a mistake on a tax return. It is the result of an entity choice made years ago and a structure accepted without pricing it. The fix, where there is one, starts long before a buyer calls.
Getting paid later: installment sales, escrows and earnouts
When part of the price comes later, the tax can generally come later too. Under the installment method, gain is reported as payments arrive, in proportion to each payment. Three rules change the picture:
- Recapture comes first. Ordinary-income recapture on equipment is taxed in the year of sale even if you haven’t been paid for it yet. A seller note can create a tax bill on money still sitting with the buyer.
- Big notes carry interest. When installment obligations from sales in a year total more than $5 million at year-end, the IRS charges interest on the deferred tax, every year the note is outstanding.
- Earnouts and escrows follow their own rules. Contingent payments spread your basis over the expected payments, and an escrow counts as paid to you unless your access to it is genuinely restricted.
The installment method is a deferral, not a discount. It also puts you in the position of a lender to the buyer, which is a credit decision as much as a tax one.
If you’re moving to Florida first
New York taxes residents on all of their income and nonresidents only on income from New York sources. That is why some owners move before they sell. Whether it works depends on what is being sold:
- Stock of an S corporation is generally an intangible, taxed where the seller lives. But if the buyer and sellers make a 338(h)(10) election, New York treats the gain as New York income, apportioned by how much of the company’s business is in New York. The state’s highest court upheld that rule in 2015.
- When a pass-through company sells its assets, nonresident owners pay New York tax on their share of the New York portion of the gain.
- Selling an interest in a partnership, LLC, S corporation or closely held C corporation whose New York real estate is at least half the value of its assets is New York income, no matter where the seller lives.
- A seller who leaves New York with installment payments still to come generally has to report that deferred income on the final New York resident return, unless a bond or other security is filed with the state on time.
- Nonresidents still compute New York tax as if all their income were New York’s, then pay the New York share. A large out-of-state gain can push the New York portion into the flat top rate.
Residency itself has two tests: where your domicile is, and whether you kept a New York home and spent more than 183 days here, with any part of a day counting. Moves made around a large sale draw scrutiny. The move has to be real, documented and early. Sell before or after moving? · What a residency audit looks at
Closing in December or January
This is the question of the season for owners with a deal in motion. A sale that closes December 31 is a 2026 sale. The same sale on the first business day of January is a 2027 sale, and that one-week difference moves the money.
| Closes December 2026 | Closes January 2027 | |
|---|---|---|
| Tax year | 2026 | 2027 |
| When most of the tax is due | April 15, 2027 | Mid-April 2028 |
| How long the tax money can keep earning | About three and a half months | About fifteen and a half months |
| Estimated payments during the year | A December gain can fall in the last estimate period, due in January | Generally covered by paying 110% of your 2026 tax through 2027 |
How the January deferral works. For federal estimated taxes, paying at least 110% of last year’s tax on time, for higher earners, generally avoids the underpayment penalty even when this year’s tax is far larger. For a January closing, last year is the year before the sale. The rest is due when you file, in April 2028. New York uses a similar test. The catch: the safe harbor only removes the penalty. The full balance is still due, an extension to file doesn’t extend the time to pay, and the money has to actually be there.
The date shouldn’t be chosen on tax alone. Other things move with it:
- The buyer’s year-end, financing and working-capital seasonality, which can matter more to the price than the tax timing.
- Medicare premiums two years later. A 2027 sale raises 2029 premiums instead of 2028’s.
- Charitable gifts and Roth conversions, which are planned around the high-income year. Giving in the sale year
- Holding periods: a QSBS anniversary or the one-year line for long-term gain can fall on one side of the date or the other.
- Opportunity zone funds. The 2025 tax law made the program permanent, with newly designated zones and a new five-year deferral starting in 2027. IRS transition guidance says gain realized in the second half of 2026 can qualify if it is invested in 2027 within 180 days. Only capital gain qualifies, the new zones are still being designated, and New York does not follow the federal deferral.
The New York items that show up at closing
- Sales tax bulk-sale notice. In an asset sale, the buyer must file Form AU-196.10 at least 10 days before paying or taking possession. A buyer who doesn’t becomes personally liable for the seller’s unpaid sales tax, so expect the buyer to insist on it and the state to respond with either a release or a demand that part of the price be held back. The seller files a final sales tax return within 20 days.
- Real estate transfer tax. Transferring a controlling interest, 50% or more, in a company that owns New York real estate triggers the state’s 0.4% transfer tax on the property’s value times the share transferred, even though no deed is recorded.
- Corporate tax for C corporations. In an asset sale, the company pays New York corporate franchise tax on its gain before anything reaches the owner: 6.5%, or 7.25% on the whole base once business income passes $5 million, a rate now extended through 2029.
How Morrowgate handles this. Before a letter of intent, Greg builds the after-tax number for every realistic version of the deal with your CPA: stock or assets, the allocation, the installment terms, the closing date and where you’ll live that day. You negotiate with the number that actually reaches your family, not the one on the term sheet. The attorneys draft the structure; we make sure everyone at the table is pricing the same thing.
Questions owners ask
Is there a capital gains tax in New York?
Not a separate one. New York taxes capital gains as ordinary income, at the same rates as wages, up to 10.9% in 2026.
Does Rochester have a local income tax?
No. In New York, only New York City and Yonkers impose a local income tax on residents.
Will I owe the 3.8% net investment income tax on my sale?
It depends on the company and your role. Active owners selling an S corporation or partnership interest generally don’t owe it on the part of the gain tied to the operating business. Gain on C corporation stock is generally subject to it.
Can moving to Florida before the sale eliminate New York tax?
Sometimes, partly. It depends on whether you sell stock or assets, whether the buyer makes a tax election, where the company operates, how you’re paid, and whether the move holds up in a residency audit.
Is a lower price with better terms ever worth more?
Often. A stock sale at a slightly lower price can leave more after tax than an asset sale at a higher one. The comparison only works after tax, which is why it gets modeled before anyone agrees to a price.
Where this guidance stops
This article is general education on how a business sale is taxed in New York: how the rules and the options generally work. It is not tax, legal or investment advice, and nothing here is a recommendation for your situation. Rules change and outcomes turn on the facts, which is why a CPA and an attorney look at a family’s own numbers before anything is done.
Sources
- IRS: 2026 inflation adjustments (Rev. Proc. 2025-32)
- IRS: Questions and answers on the net investment income tax
- IRS: Instructions for Form 8960 (sales of S corporation and partnership interests)
- IRS Publication 544: Sales and other dispositions of assets
- IRS: Instructions for Form 8594, asset acquisition statement
- IRS Publication 537: Installment sales
- IRS Publication 505: Tax withholding and estimated tax
- IRS Notice 2026-40: Opportunity zone transition guidance
- 26 U.S.C. § 1374: Built-in gains tax
- New York State: Tax computation worksheets, Form IT-201 instructions
- New York State: 2026 withholding and rate tables (IT-2105 instructions)
- New York State: S corporations and the New York S election
- New York State TSB-M-10(10)I: Nonresident S corporation shareholders and 338(h)(10) elections
- New York State TSB-M-09(5)I: Sales of interests in entities owning New York real property
- New York State: Form IT-260 instructions (changing residence with installment income)
- New York State: Bulk sales
- New York State Publication 576: Real estate transfer tax
- Tax Adviser: Personal goodwill and the net investment income tax