The buyer is insisting on an asset sale structure to write up our tangible assets for depreciation benefits, but this will trigger massive tax depreciation recapture for us. How do we structure a tax gross-up or purchase price adjustment to neutralize this hit?

Question

Tyler Smith · Accepted Answer

An asset sale allows a buyer to step up the tax basis of your acquired assets and write them off quickly, but it can trigger severe depreciation recapture taxes for you, turning capital gains into high-rate ordinary income. To prevent this, you must negotiate the purchase price allocation under Section 1060 of the Internal Revenue Code. Do not leave this detail to the closing documents, negotiate it directly in the letter of intent. If the buyer insists on an asset sale, require a tax gross-up or a higher purchase price to offset your increased tax liability. Use your financial modeling to run a side-by-side comparison of your net after-tax proceeds in both a stock sale and an asset sale. This analysis gives you the hard data needed to justify a purchase price adjustment. Explain that while you understand their desire for tax depreciation benefits, you will not fund their tax savings out of your own proceeds. By addressing this allocation early and linking it to your net cash requirements, you protect your exit proceeds and ensure the deal structure remains fair to both parties.