The buyer insists on structuring our acquisition as an asset purchase for the tax step-up, but our tax advisor says our double taxation as a C-corp or ordinary income tax hits make an asset deal unacceptable. How do we negotiate the spread between an asset sale and a stock sale?

Question

Tyler Smith · Accepted Answer

Buyers almost always demand an asset purchase because it allows them to step up the tax basis of your assets under Section 197 and amortize that basis over fifteen years. It also leaves historical liabilities behind with you. Conversely, sellers prefer a stock sale because the entire net proceeds are taxed once at favorable long-term capital gains rates.

When a buyer insists on an asset structure, you must calculate the exact tax delta between the two transaction models before agreeing to an enterprise purchase price.

In an asset sale, your proceeds are chopped into different tax categories based on the asset allocation agreed to on IRS Form 8594. Depreciated equipment, inventory, and accounts receivable trigger ordinary income tax rates, while only true goodwill gets capital gains treatment. If your company is a C-corporation, an asset sale triggers severe double taxation: first at the corporate level, and again at the shareholder dividend level.

To resolve this conflict without blowing up the deal, you have two structural paths:
- Negotiate a purchase price gross-up. Calculate the exact dollar difference between your net proceeds in a stock sale versus an asset sale, and require the buyer to increase the purchase price by that amount to make you whole. Buyers are often willing to pay a premium because the tax savings from the depreciation step-up offset the higher headline price.
- Utilize a Section 338(h)(10) election if you are an S-corporation. This election treats a legal stock purchase as an asset purchase for tax purposes, giving the buyer their step-up while keeping the legal transaction simple, provided the buyer funds the resulting tax gap.

Never sign a letter of intent that specifies an asset sale without a definitive gross-up formula in place.