A 64-year-old owner faces a $740,000 tax bill on a $3.2 million S-corp sale due to federal and state capital gains rates without prior planning.
A 64-year-old California business owner selling a closely held S-corporation for $3.2 million faces a $740,000 capital gains tax bill. The tax stems from a $2.8 million gain after a $400,000 cost basis, subject to federal and state rates totaling over 33%.
Federal long-term capital gains tax at 20% applies to the $2.8 million gain, generating $560,000 in liability. An additional 3.8% Net Investment Income Tax adds $106,400, while California’s top 13.3% rate pushes the total bill closer to $1 million without tax planning.
Owners often discover tax implications too late, as planning tools like Section 1202 may not apply retroactively. The scenario is common among small business sellers unaware of combined federal and state tax burdens before closing deals.