The buyer is insisting on an asset sale and wants to allocate the purchase price heavily toward inventory and equipment, but our accountant says this will trigger massive ordinary income taxes. How do we negotiate the Section 1060 allocation to maximize our net after-tax cash?

Question

Tyler Smith · Accepted Answer

An asset sale is highly beneficial for buyers because they get a tax step-up, allowing them to write off the purchase price through rapid depreciation. However, the allocation of that purchase price under Section 1060 of the Internal Revenue Code dictates your tax rate.

If the buyer allocates significant value to inventory, receivables, or depreciable equipment, you will pay high ordinary income tax rates on those amounts. To maximize your net proceeds, you must negotiate to allocate the maximum allowable amount to capital gains assets, specifically goodwill and customer lists.

Begin this negotiation early by agreeing on a specific allocation framework before signing the Letter of Intent. Do not leave the Section 1060 allocation for the lawyers to fight over in the final days before closing.

Present your clean operational data to show that your physical assets are minimal and that the true value of your business is intangible. Your value is built on your brand, your documented processes, and your self-sustaining team.

If the buyer refuses to shift the allocation toward goodwill, demand a purchase price adjustment to compensate for your increased tax liability. This ensures you walk away with the exact net cash you planned for.