The short answer: A Section 338(h)(10) election is a joint election that lets a buyer purchase a corporation's stock but be taxed as if it bought the assets, delivering a stepped-up basis, new depreciation, and 15-year goodwill amortization. It requires an S corporation (or a subsidiary) target, a corporate buyer, a qualified stock purchase of ≥80% within 12 months, and the consent of the buyer and all selling shareholders. The seller often owes more tax, so buyers usually gross up the price. Educational only, this is complex; use a CPA and deal attorney.
The problem it solves
Buyers want asset sales for the step-up. But some businesses can't practically be sold as assets: a franchise agreement, a state license, key customer contracts, or a favorable lease may be non-transferable, so the value lives inside the corporation itself. Buy the corporation's stock and you'd normally inherit the seller's old, low basis, losing all those deductions. The 338(h)(10) election is the bridge: legal stock sale, tax asset sale.
A 338(h)(10) is a stock deal wearing an asset deal's tax coat.
The requirements
All of these must hold, or the election isn't available:
| Requirement | Detail |
|---|---|
| Target entity | An S corporation, or a corporate subsidiary of an affiliated/consolidated group (not the parent) |
| Buyer | Must be a corporation (S-corp or C-corp) |
| Qualified stock purchase | Acquire ≥ 80% of the target's stock by vote and value within a 12-month period, all in taxable transactions |
| Consent | Buyer and all selling shareholders (including any who don't sell) must consent |
| Filing | Filed jointly on Form 8023, generally by the 15th day of the 9th month after the acquisition |
Sources: IRC § 338(h)(10); Treas. Reg. § 1.338(h)(10)-1; IRS Form 8023. Note the corporate-buyer requirement, an individual can't make the election directly, which is one reason the buyer entity you set up matters.
336(e) is the cousin for non-corporate buyers
A Section 336(e) election reaches a similar deemed-asset-sale result and, unlike 338(h)(10), doesn't require the buyer to be a corporation, useful when your acquisition vehicle is an LLC or individual. The eligibility differs; ask your CPA which fits.
Worked example: the step-up you gain
You buy the stock of an S-corp distribution business for $1,500,000. The company's old inside asset basis is only $300,000. Without an election you'd depreciate off that $300k forever. With a 338(h)(10), the deemed asset sale steps your basis up to the $1.5M you actually paid:
| Item | Plain stock sale | With 338(h)(10) |
|---|---|---|
| Buyer's asset basis | $300,000 | $1,500,000 |
| New depreciable / amortizable basis | $0 new | $1,200,000 new |
| Goodwill to amortize over 15 yrs | none | ~$700,000 |
| Est. added annual deductions* | $0 | tens of $k+ |
*Depends on the asset-class allocation, equipment can be 100% bonus in year one, goodwill amortizes over 15 years. The buyer captures roughly $1.2M of new basis it would not have had in a plain stock sale.
The seller pays, so you probably pay too
Because it's taxed as an asset sale, the seller can lose capital-gains treatment and face depreciation recapture and ordinary income. Sellers rarely agree for free; buyers typically gross up the price to make the seller whole. Run the math: the election only wins if your step-up benefit (present value of future deductions) exceeds the gross-up you pay. This is a CPA calculation, not a rule of thumb.
Not sure if you even need stock?
Start with the plainer fork, asset vs. stock, before reaching for an election.
Frequently asked questions
A joint tax election that treats the sale of a corporation's stock as if it were a sale of the company's assets. The buyer legally buys stock but gets asset-sale tax treatment, stepped-up basis and fresh depreciation and amortization, while the deal stays a stock purchase for legal and licensing purposes.
The target must be an S corporation or a corporate subsidiary of an affiliated group. The buyer must be a corporation making a qualified stock purchase, at least 80% of the stock by vote and value within 12 months. Buyer and all selling shareholders must consent.
It delivers the buyer's favorite outcome, a stepped-up basis, while keeping the simplicity of a stock deal. That means new depreciation, 15-year goodwill amortization, and no inherited tax attributes, without retitling assets, contracts, and licenses one by one.
The seller usually does, the deemed asset sale can create depreciation recapture and ordinary income instead of pure capital gain. Buyers typically gross up the price to cover it, so the election only makes sense when the buyer's step-up benefit exceeds that gross-up.
Keep reading
- Asset vs. stock sale, the decision that leads here.
- Asset sale tax treatment, the result you're recreating.
- Goodwill amortization (Section 197), what the step-up unlocks.
- LLC vs. S-corp, why the corporate-buyer rule matters.
- Tax benefits of buying a business.
Sources
- IRC § 338(h)(10) and Treas. Reg. § 1.338(h)(10)-1, deemed asset sale on a qualified stock purchase.
- Making the election, IRS Form 8023 and instructions.
- Section 336(e) election, Treas. Reg. § 1.336-1 et seq. (alternative for non-corporate buyers).
