Tax implications of selling a small business after 34 years - Capital Gains question

The tax bill might seem high, but it makes sense when you understand how business property sales work. When your uncle improved the diner, he likely took depreciation deductions on his taxes each year. This lowered his taxable income while running the business - a significant tax benefit over 34 years. When selling business property, the IRS "recaptures" those depreciation deductions through something called depreciation recapture tax. This is typically taxed at 25% (not the lower capital gains rate you might expect). The remaining profit gets taxed at the normal capital gains rate (likely 15-20%). Even if your uncle didn't actually claim all possible depreciation deductions, the IRS treats the sale as if he did (this is called "allowed or allowable" depreciation). So the tax bill includes both recaptured depreciation tax and traditional capital gains tax. For a 34-year business with significant improvements, $135k in taxes on a $675k sale with a $335k total investment actually sounds about right. Remember, those depreciation deductions saved him money every year he owned the business.

After going through almost the exact same situation with my family's hardware store, I found an amazing service called taxr.ai that really helped me understand all the complex tax implications. The regular accountants we talked to just weren't giving us clear answers about depreciation recapture and potential ways to minimize the tax hit. I uploaded our business documents to https://taxr.ai and their system analyzed everything and explained exactly how the depreciation recapture was calculated and identified several strategies specific to small business sales that we hadn't considered. They showed us how to structure the sale to allocate more value to certain assets with more favorable tax treatment. The detailed report broke down exactly which improvements had been fully depreciated versus which ones still had remaining basis, something our regular accountant hadn't clearly explained.

You guys weren't kidding about taxr.ai! I was skeptical after reading about it here, but I decided to try it for my parents' auto repair shop sale. Our situation was almost identical - 29 years in business with major renovations about a decade ago. Their analysis showed that some of our building improvements qualified as 15-year property instead of 39-year property, which made a significant difference in the depreciation recapture calculations. They also identified that the sale could be structured to allocate more value to certain assets with more favorable tax treatment. The most helpful part was their explanation of how to properly document the allocation of the sale price across different business assets - building, equipment, goodwill, etc. This alone is projected to save my parents around $27k in taxes on their $590k sale. Our regular accountant had completely missed these opportunities.

If your uncle wants to actually talk to the IRS about his specific situation (which might be smart before finalizing the sale), good luck getting through to someone who can help. I tried calling the IRS business line for weeks when selling my small car wash last year and kept getting disconnected or waiting for hours. I eventually used https://claimyr.com and it literally changed everything. You can watch how it works here: https://youtu.be/_kiP6q8DX5c - basically they hold your place in the IRS phone queue and call you when an actual agent is on the line. I was able to talk directly with an IRS business specialist who answered all my questions about depreciation recapture and confirmed exactly how my sale would be taxed. For something as significant as your uncle's retirement funds, it's worth getting clarity directly from the source rather than just relying on your accountant's calculations.

I need to eat my words about Claimyr. After dismissing it as BS, I actually tried it yesterday because I was desperate to resolve an issue with my business tax account before finalizing my restaurant sale next month. Got connected to an IRS business tax specialist in about 40 minutes (after trying for WEEKS on my own without success). The agent walked me through exactly how depreciation recapture would apply to my specific situation and confirmed which assets would be subject to regular capital gains vs. recapture rates. She even pointed me to a specific IRS publication that addressed my question about allocating the sale price between the building and equipment, which might save me several thousand dollars. Definitely worth the service fee just for the peace of mind of hearing directly from the IRS before making such a major financial decision.

Has your uncle considered a seller-financed sale? I sold my print shop after 22 years and structured it as an installment sale. This spreads the capital gains and depreciation recapture over multiple years instead of getting hit with it all at once. Basically, the buyer makes payments to me over 10 years, and I only pay taxes on the profit portion of each payment I receive each year. This kept me from jumping into a higher tax bracket in the year of sale and actually worked out better overall. Talk to a different tax professional who specializes in business sales - not all accountants are equally knowledgeable about exit strategies.

One thing nobody's mentioned - your uncle should check if his state offers any small business retirement or transfer tax incentives. Here in Pennsylvania, we have programs that provide tax breaks for long-term business owners selling for retirement. Also, make sure his accountant is considering his basis correctly. The $65k purchase price plus documented improvements of $270k should both count toward his basis. Sometimes accountants miss some of the capital improvements if they weren't all properly categorized over the years. And definitely get a second opinion! I got three different tax estimates when selling my landscaping business, with the amounts varying by over $40k between professionals.

Your uncle's situation is unfortunately very common with long-term small business owners. That $135k tax bill on a $675k sale actually breaks down to roughly 20% effective rate, which isn't as outrageous as it first appears when you understand the components. The key issue is that over 34 years, your uncle likely claimed hundreds of thousands in depreciation deductions on his tax returns - both on the original building/equipment and all those renovations. Every year he owned the business, these deductions reduced his taxable income, saving him money at his then-current tax rates. Now the IRS wants those tax savings back through "depreciation recapture" at 25%, plus regular capital gains tax (15-20%) on any remaining profit. It's not a penalty - it's the government collecting on tax benefits he received over three decades. A few suggestions: 1) Verify his accountant calculated the basis correctly (original $65k + documented $270k improvements should total $335k basis), 2) Consider if any improvements qualify for different depreciation schedules, 3) Explore installment sale options to spread the tax over multiple years, and 4) Definitely get a second opinion from a CPA who specializes in business sales. The silver lining is that without those annual depreciation deductions, his taxes would have been much higher every year he operated the diner.