Tax Implications of Selling a Business in California: 2026 Guide

Tax Implications of Selling a Business in California: Updated Guide for 2026

Selling a business in California is a significant financial decision that comes with several tax implications that every seller must consider. From capital gains taxes to local regulations, knowing how these factors apply to your situation can help you make educated decisions that benefit your financial future. As a CPA based in Burbank, Calculus Tax is committed to providing local business owners with the information they need to navigate these complexities.

What to Expect When Selling Your Business

When you decide to sell your business, several tax considerations will come into play:

• Capital Gains Tax: This tax applies to the profit earned from selling business assets. The IRS defines this as the difference between the sales price and your basis (essentially, what you invested in the business).
• Net Investment Income Tax (NIIT): If your modified adjusted gross income exceeds a certain threshold, you might be subject to an additional 3.8% tax on your investment income, which includes capital gains from the sale.
• State Taxes: California imposes state income taxes on the capital gains from the sale of your business. Current rates can significantly affect your overall profit.

Understanding Capital Gains Tax in California

Short-Term vs. Long-Term Capital Gains

• Short-Term Capital Gains: If you hold the business for less than one year before selling, the profit is treated as short-term capital gains. This means it will be taxed at your ordinary income tax rate, which can be significantly higher.
• Long-Term Capital Gains: If you hold the business for more than one year, it qualifies for lower long-term capital gains tax rates.

Preparation Is Key

To prepare for the tax implications, consider the following steps:

1. Determine Your Basis: Calculate your basis in the business, including any improvements made over time.
2. Document Everything: Keep detailed records of your income, expenses, and deductions to provide a clear picture to the IRS.
3. Consult a Tax Professional: Engage with a CPA familiar with California tax laws to ensure you’re compliant and to help identify potential deductions.

Tax Structure in California

California tax laws can be quite complex. Key areas to consider include:

• Franchise Tax Board (FTB) Regulations: Unlike many states, California imposes a minimum franchise tax, even on businesses that may not generate income.
• CA Form 540: This form is used for reporting your personal income tax, including any capital gains.
• Payroll Taxes: If your business sells, understanding the payroll tax (DE-9) implications is crucial, especially if you have employees that might transition to the new company.

Local Tax Considerations

Being based in Burbank and serving clients throughout Los Angeles, it’s also essential to understand various local taxes that may impact the sale:

• City Business Taxes: Some local jurisdictions impose business taxes that may be applicable when you sell your business.
• Neighborhood Specific Considerations: Areas like Toluca Lake, Glendale, and North Hollywood may have varying local regulations. Each locality can impose additional taxes that could affect the sale.

Practical Steps for Selling Your Business

To minimize your tax burden upon selling your business, consider these actionable steps:

1. Assess Value: Work with a business appraiser to understand your business's market value.
2. Structure the Sale: Depending on your business type, decide whether to sell assets or stock, as this can impact tax liabilities. Seek advice on the most tax-efficient structure.
3. Timing Matters: Pay attention to when you sell the business. Selling in a low-income year may reduce your overall tax burden.
4. Document Everything: Maintain transparent and organized financial records to simplify the tax reporting process.

Common Questions About Selling a Business in California

What are the main taxes owed when selling a business?

When selling a business, the primary taxes owed include capital gains taxes on the net profit realized from the sale, as well as any applicable state income taxes in California.

How can I reduce my tax burden when selling?

Consider strategies such as choosing a tax-efficient sale structure, timing the sale for a lower income year, and consulting with your CPA to identify applicable deductions.

Do I need to pay taxes on the entire sales price?

No, you are only taxed on the profit you make from the sale, not the entire sales price. This is calculated as the sales price minus your basis in the business.

What IRS forms should I be aware of?

You’ll typically need to file IRS Form 4797, which is for sales of business property, and may also need to report earnings on your Schedule D of Form 1040.

Are there local taxes to consider in Burbank?

Yes, local business taxes may apply, depending on your business structure and municipality. It’s essential to check with the Burbank city tax office for details.

Should I consult a professional before selling?

Absolutely. Engaging a CPA, like those at Calculus Tax, can provide invaluable insights and guidance tailored to your specific situation and goals, ensuring that all tax considerations are adequately addressed.

Conclusion

Selling a business in California is not just about finding the right buyer and closing the deal; it’s also about strategically navigating the tax implications associated with the sale. By understanding capital gains taxes, adhering to local regulations, and proactively planning your sale, you’ll enhance your financial outcome.

Calculus Tax stands ready to assist Burbank and greater Los Angeles business owners through every step of this process. Whether you’re seeking to understand your tax liabilities or need tailored advice, we are here to help!