Selling a Plumbing Business: Taxes When the License Is in Your Name

The license is the asset the buyer cannot buy

Plumbing is a licensed trade, and the license usually belongs to a person, not the company. Ohio is a clear example. The Ohio Construction Industry Licensing Board issues a plumbing contractor license in the name of the qualifying individual, who then assigns it to the contracting company (ORC 4740.07(A) and (B)). If that individual leaves the company for any reason, the assignment becomes invalid 90 days after the change of company form is filed, unless another licensed individual has also assigned a license to the company (ORC 4740.07(D)). The licensee must also stay readily available for consultation with the company (ORC 4740.07(G)).

So a buyer without its own licensed plumber cannot simply take over. It needs you to keep your license assigned for a while, or it needs to hire or promote a new qualifier. That bargaining position is valuable, and how the buyer pays for it decides your tax.

Four ways the buyer can pay you, four tax results

Notice the buyer's incentive. Goodwill and a non-compete cost the buyer the same 15-year write-off, but consulting fees are deductible right away, so buyers like moving price into a qualifier or consulting agreement. For you, that move swaps a 20% rate for rates up to 37% in 2026 plus payroll tax. Our personal goodwill sale page explains when goodwill can be yours rather than the company's.

Get the labels right before you sign

The IRS and the courts generally take the parties at their word on a signed allocation. In Muskat v. United States, 554 F.3d 183 (1st Cir. 2009), a seller who signed an agreement paying him $1 million for a non-compete later argued the money was really for his personal goodwill. The court held him to the written allocation. The lesson for a plumbing owner: decide what the qualifier payments, goodwill and non-compete are worth while the agreement is still a draft, and support the numbers with a valuation. IRC 1060 and Form 8594 then require both sides to report the same allocation.

A fair approach is to pay a market wage for real post-closing work (the license assignment requires you to be available) and keep the rest of the value in goodwill. A license-holding fee far above market is the part most likely to look like disguised purchase price, and it is taxed at the higher rate either way.

Parts inventory, vans and receivables

• Parts and fixtures on the shelves and trucks are inventory. Any price above cost is ordinary income (IRC 1221(a)(1)), and inventory cannot be reported on the installment method (IRC 453(b)(2)(B)), so it is taxed in the year of sale even if you carry a note. Count it at closing, at cost, to keep it from absorbing goodwill value.
• Service vans and equipment written off with expensing are Section 1245 recapture, ordinary income in the year of sale. The HVAC sale page covers fleet allocation in depth, and depreciation recapture covers the rule.
• Receivables of a cash-method company have a zero basis, so whatever the buyer pays for them is ordinary income. Collecting them yourself after closing gives the same result.

Residential service vs commercial work

The service mix changes what the buyer is paying for. A residential service and drain company sells phone numbers, reviews, membership plans and repeat customers, so most of its value is goodwill and the license question dominates. A commercial or new-construction plumbing contractor has more of its value in open contracts, receivables and retainage, which tend to produce ordinary income, and in bonding capacity that may depend on the owner's personal indemnity. Commercial contractors with long jobs should also read our construction company page on how contracts in progress are taxed at sale.

Ohio: goodwill is business income, consulting is not

Ohio treats gain from selling goodwill, or an ownership interest where the seller materially participated, as business income (ORC 5747.01(B)). For 2026 the first $250,000 of business income is deducted and the rest is taxed at 3% (ORC 5747.01(A)(28), ORC 5747.02 as amended by HB 96). Compensation paid to an employee is nonbusiness income (ORC 5747.01(C) and (D)), taxed at the 2.75% nonbusiness rate in 2026, with no $250,000 deduction. Our worked example applies the business income treatment to every year, so its Ohio layer stays close ($73,500 against $72,000); if the qualifier fees are paid as W-2 wages, ask your CPA to run them as nonbusiness income instead. The federal side carries the real cost: $20,056 more federal income tax, before payroll tax. Some Ohio school districts using the traditional base also tax the gain. See our Ohio page.

Ways plumbing sellers keep more

• License a second qualifier early. If a key employee becomes licensed and assigns a license to the company before the sale, the buyer needs less of you, and less of the price has to run through consulting fees (ORC 4740.07(D)(2)).
• Keep post-closing pay at market and leave the rest in goodwill.
• Spread the goodwill with an installment sale; see seller financing for note protections.
• Separate personal goodwill from company goodwill where the facts support it, especially if you own a C corporation (purchase price allocation).

To price each label and timing choice for your own numbers, get the Big Sale Tax Analysis.

Run your own numbers

Frequently asked questions