The buyer insists on an asset sale for tax depreciation benefits, which will trigger heavy ordinary income tax recapture for us on our equipment and intangibles. How do we negotiate the purchase price allocation to protect our net valuation?

Question

Tyler Smith · Accepted Answer

In an asset purchase, the IRS requires both buyer and seller to agree on the purchase price allocation using Form 8594. The buyer wants to allocate as much money as possible to fast-depreciating assets, like equipment and software, to maximize their immediate tax deductions. As the seller, this is highly disadvantageous because it triggers ordinary income tax depreciation recapture, which is taxed at a much higher rate than capital gains.

To protect your net proceeds, you must negotiate the Section 1060 allocation early in the process, ideally before signing the letter of intent. Your goal is to maximize the allocation to Class Seven assets, which represent goodwill and going-concern value. Goodwill is taxed at favorable long-term capital gains rates.

If the buyer refuses to budge on the allocation because they need the depreciation benefits to make their financial models work, you must negotiate a purchase price gross-up. Calculate the exact tax difference between their proposed allocation and your ideal structure. Require the buyer to increase the overall purchase price to cover this tax delta, ensuring that your net, after-tax cash proceeds remain exactly where they need to be to satisfy your exit goals.