The buyer is insisting on an asset purchase agreement so they can write up our assets for tax depreciation, but we want a stock sale to avoid double taxation. How do we negotiate a structural compromise or a purchase price adjustment to bridge this tax gap?

Question

Tyler Smith · Accepted Answer

In an asset sale, the buyer can step up the tax basis of your tangible and intangible assets, allowing them to claim substantial depreciation write-offs. For you, the seller, an asset sale can trigger double taxation at the corporate level if you are a C-corp, or significant ordinary income tax rates due to depreciation recapture if you are an S-corp or LLC. A stock sale, conversely, yields capital gains treatment on the entire purchase price.

If the buyer insists on an asset structure, you must calculate the exact net after-tax proceeds of both options. Do not guess. Have your CPA run a side-by-side tax model showing the impact of both structures.

Once you know the financial delta, negotiate a purchase price gross-up. Require the buyer to increase the purchase price of the asset sale to ensure your net walk-away cash is identical to what you would receive in a stock sale. Alternatively, you can propose a hybrid structure, such as a joint Section 338(h)(10) election, which treats a stock sale as an asset sale for tax purposes, allowing you to negotiate a shared division of the resulting tax benefits.