The buyer insists on an asset purchase to get a step-up in basis for depreciation, but our CPA says the resulting ordinary income and double taxation will cost us twenty percent of our net proceeds. How do we calculate and negotiate an asset-to-stock tax gross-up into the purchase price?

Question

Tyler Smith · Accepted Answer

Buyers strongly prefer asset purchases because Section 1060 allows them to step up the tax basis of the acquired assets to fair market value, enabling massive future depreciation deductions. For sellers, particularly operating companies with depreciable equipment or C-corporations, an asset purchase is toxic. It triggers depreciation recapture taxed at ordinary income rates up to thirty-seven percent rather than long-term capital gains rates of twenty percent, and for C-corps, it triggers entity-level double taxation.

To negotiate this, never accept an asset deal structure without an asset-to-stock tax gross-up:

- Build a parallel tax model. Have your transaction CPA calculate the net cash proceeds of a pure stock sale versus an asset sale under the buyer's proposed purchase price allocation. Quantify the exact dollar gap created by ordinary income rates and state taxes.
- Price the tax friction. The difference between those two numbers is your tax drag. If a stock sale at ten million dollars nets you 7.8 million after capital gains, but an asset sale nets you 6.2 million due to depreciation recapture, your deal requires a 1.6-million-dollar gross-up.
- Monetize the buyer's tax shield. Show the buyer that their basis step-up generates millions in tax savings across the next fifteen years. The gross-up is simply splitting the economic value of the tax shield they are creating.

Draft this directly into the letter of intent. State explicitly that the transaction will be structured as a stock purchase or a Section 338(h)(10) election with a purchase price adjustment sufficient to yield equivalent after-tax net cash proceeds to the seller.