The buyer is pushing for a Section 338(h)(10) election to treat our stock sale as an asset purchase for tax purposes. How does this structure impact our net proceeds, and how do we calculate the tax gross-up we need to demand to stay whole?

Question

Tyler Smith · Accepted Answer

In a standard stock sale, you pay capital gains tax on the proceeds. In an asset sale, the buyer gets to step up the tax basis of your assets and write them off quickly, which is highly valuable to them. A Section 338(h)(10) election is a joint election for an S-Corporation that allows the transaction to be treated as a stock sale for legal purposes but an asset sale for tax purposes.

This structure can trigger a significantly higher tax bill for you. You will face ordinary income tax rates on recaptured depreciation of equipment and other assets, rather than the lower capital gains rate. To protect your net proceeds, you must calculate the exact tax differential and demand a tax gross-up from the buyer.

Work with your CPA to run a detailed purchase price allocation model. This model must estimate the taxes under both a straight stock sale and the proposed Section 338(h)(10) structure. The difference between these two figures is the tax friction of the election.

Your negotiation position must be clear. Tell the buyer you are willing to agree to the election to help them secure their tax step-up, but they must increase the purchase price by the gross-up amount so your net, after-tax cash at close is identical to a straight stock sale. This turns a tax disadvantage into a collaborative negotiation point that helps close the deal.