338(h)(10) Election
A joint tax election that lets a stock sale be treated as an asset sale for federal tax purposes, giving the buyer a stepped-up tax basis in the company's assets while the seller recognizes gain as if assets were sold.
Full Definition
A 338(h)(10) election is a joint election filed with the IRS by both the buyer and the seller that reclassifies a stock purchase as if the target company had sold all of its assets to the buyer at fair market value and then liquidated. The election is available only when the target is an S-corporation or a subsidiary of a consolidated group, and both parties must agree and file Form 8023 within specific deadlines.
How it actually works: Without the election, a stock sale means the buyer inherits the company's old tax basis in its assets — typically much lower than the purchase price. That means limited depreciation and amortization deductions going forward. With a 338(h)(10) election, the buyer gets to "step up" the tax basis to the full purchase price allocation, generating meaningful tax deductions (usually over 15 years for goodwill) that can be worth 20–30% of the purchase price in present-value terms.
The catch: the seller now pays tax as if they sold assets, not stock. A portion of the sale price gets recharacterized from long-term capital gains (typically 20% federal rate) to ordinary income (up to 37% federal rate) — especially for depreciation recapture on equipment and ordinary-rate gain on inventory. That can meaningfully raise the seller's tax bill.
Seller vs. Buyer Perspective
The election almost always costs you more in taxes than a plain stock sale would. You'll typically demand a "gross-up" — the buyer pays you extra money to make you whole after the additional tax hit. Run the math with your CPA before agreeing: the gross-up needs to account for both federal and state taxes, and the buyer's offered gross-up may understate your actual hit. If the buyer wants the election and won't gross you up, that's real money out of your pocket.
The election is a major tax win for you — you get to deduct the purchase price over time, saving cash taxes for a decade or more. The deduction is worth real money, sometimes enough to justify paying the seller a gross-up and still coming out ahead. Model the after-tax NPV of the step-up versus what you'd pay in a gross-up. Some PE firms require a 338(h)(10) in every S-corp acquisition because the tax benefit is that consistent.
Real-World Example
A $6.5M EBITDA regional food-service distributor, organized as an S-corp, is acquired by a private equity platform for $32.5M (5x multiple). The buyer wants a 338(h)(10) election. The seller's CPA estimates the election increases their tax bill by $1.8M versus a plain stock sale, because roughly $4M of the gain gets recharacterized from long-term capital gains to ordinary income (depreciation recapture on warehouse equipment plus inventory gain). The buyer agrees to a $1.8M gross-up, making the total purchase price $34.3M. The buyer's step-up gives them approximately $2.1M in tax savings over 15 years (present value), so they still come out ahead by roughly $300K. Both sides sign.
Why It Matters & Common Pitfalls
- !Eligibility is narrow. 338(h)(10) elections require the target to be an S-corp, a subsidiary of a consolidated group, or a qualified subchapter S subsidiary (QSub). Most C-corps can't use it.
- !The gross-up calculation is where deals break. Sellers should get their own tax opinion, not rely on the buyer's numbers. State taxes matter enormously — a California seller's gross-up calculation is meaningfully different from a Texas seller's.
- !F Reorganization is often a better alternative. For S-corp sellers, an F reorg can preserve single-level taxation and still give the buyer a basis step-up via a separate mechanism. Consider it before defaulting to 338(h)(10).
- !Filing deadline is strict. Form 8023 is due by the 15th day of the 9th month after the month containing the acquisition date. Miss it and the election is lost.
Frequently Asked Questions
What is a 338(h)(10) election?↓
Who benefits from a 338(h)(10) election?↓
What companies qualify for a 338(h)(10) election?↓
What is a gross-up in a 338(h)(10) election?↓
Related Terms
F Reorganization
A tax-free reorganization under IRC Section 368(a)(1)(F) that restructures an S-corporation into a new holding company — often used to give buyers a stepped-up tax basis while preserving stock-sale treatment for the seller.
Asset Sale
A transaction in which the buyer purchases specific assets and assumes specific liabilities of a business, while the seller retains the legal entity — contrast with a stock sale, where the entity itself changes hands.
Stock Sale
A transaction in which the buyer purchases the stock (or equity interests) of the target company, acquiring the entity itself along with all its assets and liabilities — contrast with an asset sale.
Purchase Price Allocation
The allocation of total purchase price across asset categories (inventory, equipment, real estate, goodwill, etc.) for tax purposes under IRC Section 1060 — affecting seller's tax treatment and buyer's future depreciation deductions.
Capital Gains (Short vs Long Term)
The tax treatment of gain from selling a capital asset (like a business). Long-term capital gains (asset held >1 year) are taxed at preferential federal rates (typically 20%); short-term gains and ordinary income can be taxed at up to 37%.
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Disclaimer: The information provided on this page is for educational and informational purposes only. It should not be considered financial, legal, or investment advice. Business valuations depend on many factors specific to each situation. Always consult with qualified professionals — including business brokers, CPAs, and M&A attorneys — before making acquisition or sale decisions. LegacyVector is not a licensed broker, financial advisor, or attorney. Data shown may be based on limited samples and may not reflect current market conditions.
LegacyVector Research Team
Reviewed by M&A professionals · Updated April 2026