338(h)(10) Election

The Problem It Solves

In a standard stock sale:

• Buyer doesn't get a stepped-up tax basis — they inherit the seller's depreciated asset values
• No depreciation reset, so no near-term tax benefit from the purchase price

In a standard asset sale:

• Buyer gets a stepped-up basis and full depreciation benefit
• But every contract, license, and permit must be assigned individually — operationally complex and potentially disruptive

A 338(h)(10) election allows a stock acquisition to be treated as a deemed asset purchase for tax purposes — the buyer gets the stepped-up basis as if they had bought assets directly, while the legal mechanics of the transaction remain a stock purchase.

When It Applies

The 338(h)(10) election is available when:

• The target is an S-corporation (most common in SMB) or certain C-corp subsidiaries
• The buyer is a corporation
• Both parties make a joint election — it requires seller's agreement, which means negotiating it into the deal

The Tax Impact on the Seller

The 338(h)(10) election generally results in higher taxes for the seller compared to a standard stock sale — the gain is treated as if it were an asset sale, which may result in more ordinary income treatment on certain components. Sellers typically require a gross-up (additional compensation) to offset this incremental tax cost.

Practical Use in SMB Deals

Most common in acquisitions of S-corps where:

• The business has significant licensure or permitting that makes a stock sale operationally preferable
• The buyer is a corporation or PE firm that benefits from the stepped-up basis
• The parties can negotiate the tax cost-sharing arrangement