We are structured as an S-Corporation and the buyer is insisting on a Section 338(h)(10) election to treat the transaction as an asset purchase for tax purposes. How do we calculate the tax gross-up required to offset our increased tax liability so we walk away with our target net proceeds?

Question

Tyler Smith · Accepted Answer

A buyer's request for a Section 338(h)(10) election is an attempt to gain a massive tax benefit. By treating your stock sale as an asset purchase for tax purposes, the buyer can step up the tax basis of your assets and write off depreciation and amortization over time.

However, this election can significantly increase your tax liability as the seller. It triggers ordinary income tax rates on recaptured depreciation and intangible assets, which are much higher than capital gains tax rates.

To protect your net proceeds, you must insist on a tax gross-up provision. This clause requires the buyer to pay an additional cash amount at close to fully offset your incremental tax burden. The goal is to ensure your net, after-tax cash proceeds from the transaction with the election are exactly equal to what you would have received in a straight stock sale.

Engage a specialized tax CPA immediately to model the asset allocation and calculate the exact gross-up amount. Present this quantitative analysis to the buyer early in the negotiations. If they refuse to fund the gross-up, withdraw your consent for the Section 338(h)(10) election. This keeps your target net proceeds intact.