The short answer: In an asset sale the buyer takes a stepped-up basis equal to the price paid, allocated across seven asset classes on Form 8594. You then recover each class going forward, equipment often 100% in year one, real property over 39 years (faster with cost segregation), and goodwill/intangibles straight-line over 15 years (Section 197). The buyer pays no tax at closing; depreciation recapture is the seller's problem. Educational only, confirm with a CPA.
What an asset sale is
In an asset purchase, a buyer entity (usually a fresh LLC) buys the operating assets, equipment, inventory, customer relationships, the brand, goodwill, and typically leaves the seller's old legal entity (and most of its liabilities) behind. Compare this head-to-head in asset vs. stock sale. The tax consequence is the whole point: your basis steps up to the price you paid.
Buy the assets, not the entity, and the tax code lets you start the depreciation clock over.
The purchase price allocation
The IRS requires the total price to be split across seven asset classes under the "residual method" (IRC § 1060), reported by both parties on Form 8594. Goodwill is the residual, whatever's left after the other classes are valued.
| Class | Assets | Buyer's recovery |
|---|---|---|
| I | Cash & deposits | None (dollar for dollar) |
| II | Marketable securities, CDs | None |
| III | Accounts receivable | Collected, not depreciated |
| IV | Inventory | Deducted as sold (COGS) |
| V | Equipment, vehicles, real property | Depreciation / bonus / §179 |
| VI | Section 197 intangibles (customer lists, non-competes) | 15-yr amortization |
| VII | Goodwill & going-concern value | 15-yr amortization |
Because Class V can be written off fast and Classes VI, VII take 15 years, the buyer wants more price in Class V. The seller often wants more in Class VII (goodwill) for capital-gains treatment. Same total, very different tax outcomes, which is why allocation is negotiated, then locked in identically on both parties' returns.
Buyer and seller must match
You and the seller must report the same allocation on Form 8594. Mismatched forms are an audit flag. Agree the allocation inside the purchase agreement, don't leave it to be sorted out at tax time.
Worked example: step-up in action
You buy a $1,200,000 HVAC business as an asset sale. Here's the allocation and the buyer's first-year recovery (illustrative):
| Class | Assets | Allocated | Year-1 deduction |
|---|---|---|---|
| IV | Inventory | $100,000 | as sold |
| V | Trucks & equipment (100% bonus) | $400,000 | $400,000 |
| VI | Customer list + non-compete | $200,000 | $13,333 |
| VII | Goodwill | $500,000 | $33,333 |
| Total | $1,200,000 | ≈ $446,666 | |
The Class VI + VII intangibles ($700,000) amortize at $700,000 ÷ 15 = $46,666/yr, of which $46,666 shows here; the trucks and equipment are fully expensed in year one under 100% bonus depreciation. That's roughly $447k of first-year deductions against the income you just bought.
Recapture is the seller's headache
Sellers resist asset sales partly because of depreciation recapture, the assets they've already written down get "recaptured" as ordinary income, taxed higher than capital gains. That's the seller's cost, not yours. As the buyer, you simply start with a new basis and a clean depreciation schedule. Recapture only touches you if you later resell.
Compare both structures side by side
Asset vs. stock is the first fork in every deal, see how they differ.
Frequently asked questions
The buyer takes a stepped-up basis equal to the price, allocated on Form 8594, then depreciates or amortizes each class going forward, equipment often 100% in year one, real property over 39 years (or faster via cost seg), goodwill and intangibles over 15 years. No tax is due from the buyer at closing.
It assigns the total price to seven IRS asset classes on Form 8594. Each class recovers on a different schedule, so the allocation controls how fast the buyer gets deductions and how the seller is taxed. Buyer and seller must report the same numbers.
Stepped-up basis, fresh depreciation and 15-year goodwill amortization, the ability to choose which liabilities to assume, and no inherited hidden tax exposure. Sellers often prefer stock sales for simpler capital-gains treatment, so structure is negotiated.
No, recapture is the seller's issue, converting part of their gain to ordinary income. The buyer starts fresh with a new basis and new schedules. Recapture only becomes the buyer's concern if and when the buyer eventually resells.
Keep reading
- Tax benefits of buying a business, the full menu of deductions.
- Goodwill amortization (Section 197), Classes VI & VII.
- Bonus depreciation & cost seg, Class V, fast.
- 338(h)(10), an asset sale inside a stock deal.
- Asset vs. stock sale and valuation.
Sources
- Residual method & asset classes (IRC § 1060), IRS Form 8594 and instructions.
- Section 197 15-year amortization, IRS Rev. Rul. 2004-49; IRC § 197.
- Depreciation, bonus, and § 179, IRS Pub. 946.
