The buyer is insisting on an asset purchase structure for tax depreciation benefits, but our CPA says the double taxation will wipe out our net proceeds. How do we negotiate a purchase price gross-up to offset the tax penalty of an asset sale versus a stock sale?

Question

Tyler Smith · Accepted Answer

Buyers prefer asset sales because they obtain a stepped-up tax basis in the acquired assets, allowing them to depreciate those assets and shield future earnings. They also avoid inheriting unknown historical liabilities. Sellers of C-corporations or S-corporations with heavy depreciation recapture prefer stock sales, which generate a single layer of long-term capital gains tax.

If you sell assets out of an entity subject to corporate income taxes, or an S-corp with substantial equipment subject to Section 1245 recapture, you face a double tax hit or ordinary income rates that can erode thirty to forty percent of your gross proceeds. You cannot simply accept an asset sale without pricing the tax penalty into the purchase price.

Start by having your CPA prepare a detailed tax model showing your net after-tax proceeds under both a stock sale and an asset sale. Calculate the exact dollar delta between the two scenarios. When the buyer demands an asset structure, present this model during LOI negotiations and demand a purchase price gross-up that holds you harmless on an after-tax cash basis.

Alternatively, propose a joint Section 338(h)(10) or Section 336(e) election. This allows the transaction to be legally structured as a stock sale while being treated as an asset sale for federal income tax purposes. The buyer gets their desired tax step-up, but you only sign the election if the purchase agreement includes a contractual covenant requiring the buyer to pay the incremental tax difference and reimburse your professional fees for the calculation. Never concede deal structure without modeling after-tax proceeds.