Whether you sell your business via an asset sale or a stock sale, Texas may tax the gain , but how and when depends on the deal structure. Unlike federal capital gains, Texas imposes a Franchise (margin) tax on certain receipts, including built-in gain from asset sales. Here’s how to structure exits in 2025 to manage your Texas tax exposure.
Asset Sale vs Stock Sale: What’s the Difference?
| Asset Sale | Stock Sale |
|---|---|
| Buyer purchases business assets | Buyer purchases ownership interests |
| Seller retains the legal entity | Entity and contracts remain intact |
| Gain allocated to individual assets | Gain taxed at shareholder level (federal) |
| Often preferred by buyers | Often preferred by sellers |
For Texas margin tax purposes, asset sales by the entity are taxable events , even if federally treated as capital gains.
What Is Built-In Gain?
Built-in gain is the difference between the sale price and book value of an asset. Texas Franchise Tax law under §171.1011(g) includes gross receipts from asset sales in total revenue , meaning the gain can increase your margin tax base.
Important: There is no exemption for capital gains under Texas Franchise Tax rules.
When Does Texas Tax Apply?
Texas Franchise Tax Applies When:
- The entity sells tangible or intangible assets
- The assets were used in a Texas-based business
- The seller is a taxable entity under Texas law
- Revenue from the sale is booked on the company’s books
This applies even if the federal tax treatment is long-term capital gain and taxed at lower rates.
Example: Tech Startup Exit (Asset Sale)
Company: BuildSoft LLC
Exit Type: Asset sale
Deal Value: $10 million
Book Value of Assets: $2 million
Built-In Gain: $8 million
Texas Impact:
- $10 million in gross receipts included in margin calculation
- Deduct COGS or compensation method
- Pay margin tax on net margin (~0.75% if above threshold)
Stock Sale Alternative:
If shareholders sell stock or membership interests, Texas does not impose tax on the gain (since individuals are not subject to state income tax).
Step-by-Step: Structuring a Tax-Efficient Exit
- Identify entity structure: LLC, S-Corp, or C-Corp
- Evaluate buyer preference (asset vs stock)
- Calculate built-in gain on assets held by the business
- If asset sale: plan for Texas Franchise Tax on full receipts
- Explore stock sale or deemed stock sale (338(h)(10)) if you want to avoid Texas margin tax at entity level
Conclusion
Texas doesn’t tax capital gains , but it does tax gross receipts from asset sales through the Franchise Tax. Business owners planning exits in 2025 must consider built-in gain implications under state law. A properly structured stock sale may result in significant state-level tax savings.
Call to Action
Schedule an exit strategy review with Anshul Goyal, CPA, EA, FCA to assess the Texas margin tax impact of your business sale and explore stock sale options to legally reduce tax exposure.
Disclaimer:
Anshul Goyal, CPA, EA, FCA is a U.S.-licensed CPA and IRS Enrolled Agent. This blog is for informational purposes only. Texas margin tax applies differently to asset and stock sales, depending on entity structure and deal terms. Always consult a qualified advisor before closing an exit.
Top 5 High-Searched FAQs
1. Does Texas tax capital gains on business sales?
Not for individuals. But asset sales by entities are included in margin tax calculations.
2. What’s the difference between asset and stock sales for Texas tax?
Asset sales by the entity trigger Franchise Tax. Stock sales typically do not.
3. Can I structure an exit to avoid Texas margin tax?
Yes, often through a stock sale or careful planning of the deal structure.
4. Are intangible asset sales taxable under margin tax?
Yes. Intangible assets like software, IP, or goodwill are included in gross receipts.
5. Does Texas recognize federal capital gain treatment?
No. Texas margin tax is based on gross receipts, not capital gain classification.
About Our CPA
Anshul Goyal, CPA, EA, FCA helps founders and business owners plan for tax-efficient exits. With deep experience in Texas Franchise Tax law and cross-border transactions, he provides clarity on asset sales, stock transfers, and state-level tax optimization.