Topic 10 · 6 min read
The 338(h)(10) Election When Selling a Business
Sell the stock, but let both sides treat it as an asset sale.
Buyers usually want assets, for the fresh depreciation. Sellers usually want stock, for the clean exit. A 338(h)(10) election lets a qualifying stock sale be treated as an asset sale for tax purposes, giving each side much of what it wanted.
What to know
- Legal form stays a stock sale
- Contracts, licenses, and permits transfer with the shares, avoiding the consent headaches of moving assets one by one.
- Tax form becomes an asset sale
- The buyer takes a stepped-up basis in the assets and depreciates them again, which is the value the buyer will pay for.
- Who can elect
- The target is generally an S corporation or a member of a consolidated group, and the buyer must acquire at least 80% of the stock.
- Both parties must agree
- The election is made jointly and is irrevocable, so it belongs in the purchase agreement, not in a post-closing conversation.
- Price allocation matters
- Splitting the price across equipment, intangibles, and goodwill drives ordinary versus capital treatment for the seller.
The tax benefit
The buyer's step-up is often worth enough that the purchase price rises to compensate the seller for any extra tax the treatment creates.
Worked example
A $5 million sale
An S corporation is sold for $5 million with a 338(h)(10) election. The buyer depreciates and amortizes the stepped-up assets, and pays a premium over the plain stock-sale price to get it.
Watch out for
- Built-in gains and recapture can turn part of the seller's proceeds into ordinary income.
- The election is unavailable for ordinary C corporation targets outside a consolidated group.
- Modeling both structures before signing is essential — this is CPA and deal-attorney work.
Terms from this topic
338(h)(10) electionStepped-up basisPurchase price allocationAsset sale
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