The buyer is insisting on an asset purchase agreement to benefit from a tax basis step-up, but our tax advisor says this will trigger significant depreciation recapture. How do we negotiate a tax gross-up or price adjustment to offset this hit?

Question

Tyler Smith · Accepted Answer

Buyers almost always prefer asset sales because they can step up the basis of the acquired assets and write them off quickly, while also avoiding historical liabilities. For you, the seller, an asset sale can be a tax disaster, triggering high ordinary income tax rates on depreciation recapture instead of lower capital gains rates.

- To resolve this, you must quantify the exact tax delta. Have your CPA calculate your net proceeds under both a stock sale and an asset sale scenario. Once you have the exact dollar difference, use this quantitative data as your negotiation baseline.

- Propose a tax gross-up, where the buyer increases the purchase price to ensure your net, after-tax proceeds remain identical to what you would have received in a stock sale. Frame this as a standard allocation of the value created by the tax step-up.

- If the buyer resists, negotiate a compromise on the asset purchase allocation under Section 1060. Allocate more of the purchase price to goodwill and intangibles, which qualify for capital gains, and less to equipment or personal property subject to recapture. This compromise protects your net cash at close while still allowing the buyer to complete the transaction as an asset purchase.