The buyer wants to allocate the majority of the purchase price to Class V assets like equipment to maximize their depreciation, which triggers heavy depreciation recapture taxes for us. How do we negotiate a more favorable asset allocation under Section 1060?

Question

Tyler Smith · Accepted Answer

Asset allocation under Section 1060 is a classic zero-sum game in deal negotiations. The buyer wants to allocate value to fast-depreciating assets like machinery to get immediate tax write-offs, while you want to allocate value to Class VII goodwill to secure long-term capital gains tax rates.

To resolve this friction, you need to conduct a thorough valuation of your physical assets under the IVS 105 Cost Approach. Determine the actual fair market value of your equipment rather than accepting the buyer's aggressive estimates. If your physical assets have depreciated significantly, do not let the buyer artificially inflate their value to your tax detriment.

Bring this issue to your leadership team's attention and make it a key priority. Use your financial advisors to model the net cash proceeds of different allocation scenarios. If the buyer insists on an allocation that triggers heavy depreciation recapture taxes, you must demand a purchase price gross-up to offset the tax impact.

Negotiate a compromise that balances the tax benefits. For example, you can agree to allocate a portion of the value to Class VI intangible assets like proprietary software or customer lists, which may offer a middle ground for both parties. Always base your arguments on defensible, third-party appraisal data to keep the negotiation objective.