338(h)(10) Election: What Price Premium Should a Seller Ask?

Direct answer: There is no standard 338(h)(10) price premium. An S corporation seller should first calculate after-tax proceeds from the same deal without the election, then model the deemed asset sale at the proposed allocation. The minimum extra price is the amount that restores the seller's after-tax proceeds after tax on the extra price itself. Compare that floor with the buyer's present-value tax benefit and other deal terms. Do this before promising the election in a letter of intent or purchase agreement.

A buyer may want the legal simplicity of buying stock and the tax benefits of buying assets. Sections 338(h)(10) and 336(e) can treat qualifying stock transactions as deemed asset sales for federal income-tax purposes. The resulting inside-basis step-up may help the buyer, while the deemed sale may change the seller's gain character, state tax, and timing. The election is an economic term, not routine closing paperwork.

Book a Return Review Call

For a pending company sale, bring the draft purchase agreement, proposed asset allocation, stock-basis records, and last corporate return. AE can review the seller-side tax model before you accept an election clause.

Why Buyers Request the Election

Without an election, a stock buyer generally takes basis in the acquired stock while the target's inside asset basis remains unchanged. A deemed asset sale allocates purchase price among receivables, inventory, equipment, real estate, identifiable intangibles, and goodwill. The buyer may recover the resulting step-up through cost of goods sold, depreciation, or amortization.

Section 338(h)(10)

A Section 338(h)(10) election is commonly available when a purchasing corporation makes a qualified stock purchase of a target that is an S corporation or a subsidiary in a consolidated or affiliated group. A qualified stock purchase generally requires acquiring at least 80% of vote and value during a 12-month acquisition period.

The purchasing corporation and S-corporation shareholders make the election jointly on Form 8023. Every shareholder must sign, including one who does not sell in the qualified stock purchase. The target is treated as selling its assets and then liquidating for tax purposes, even though the legal transaction is a stock sale. S-corporation shareholders must account for pass-through gain, stock-basis adjustments, and liquidation consequences. The IRS Form 8023 instructions generally require filing by the 15th day of the ninth month after the acquisition date; an extension of the income-tax return is not a substitute for checking this election deadline.

Section 336(e)

Section 336(e) can provide similar deemed-asset treatment for certain qualified stock dispositions, including transactions where the buyer is not a corporation. The election is generally made by the seller and target under the regulations rather than jointly with the buyer.

Eligibility, timing, consistency statements, and documentation differ from Section 338. The election is not a fallback to be added after the return deadline without reviewing the regulatory requirements.

Seller Tax Cost

The deemed asset sale can convert part of what might have been capital gain on stock into ordinary income from receivables, inventory, depreciation recapture, and certain intangible items. State tax can also differ because asset gain may be sourced to operating states. Do not compare headline federal rates alone: selling costs, liabilities included in deemed proceeds, shareholder basis, state apportionment, and payment timing can move the answer. The IRS Form 8883 instructions distinguish the seller's aggregate deemed sales price from the buyer's asset-basis calculation and require an allocation among asset classes.

For an S corporation with built-in gains exposure, the election may create an entity-level tax in addition to shareholder tax. Historical C-corporation periods, asset basis, depreciation, and the Section 1374 recognition period must be reviewed.

How to calculate the seller's 338(h)(10) price floor

Build the plain-stock baseline. Calculate each selling shareholder's cash and noncash consideration, adjusted stock basis, selling costs, federal and state tax, and net present value of deferred or contingent payments. Do not use enterprise value as if it were cash to the owners.
Model the election at the same price. Allocate the deemed sales price to receivables, inventory, depreciable property, real property, identifiable intangibles, and goodwill. Carry character and timing through the final S-corporation return, K-1s, shareholder basis, deemed liquidation, and state returns. Screen for Section 1374 built-in-gains tax if the company was formerly a C corporation.
Solve for an added price, not just the initial tax gap. Increase the offered price in the election model until each seller's after-tax proceeds reach the agreed no-election baseline. The premium can itself change deemed sale price, allocation, and tax, so rerun the model instead of adding only the first calculated tax difference.
Test the buyer's ceiling and the contract. Compare the buyer's discounted value of additional deductions with the added purchase price, integration and state costs, and audit risk. Agree who prepares and signs Form 8023, who controls the Form 8883 allocation, how later price adjustments are reported, and what happens if the election fails.

For related transaction issues, see AE's stock-versus-asset sale guide and purchase-price allocation guide. A buyer acquiring an S corporation that owns a building should separately review whether the transaction creates new property basis for cost segregation. This page owns the seller's election-price decision.

Worked example: why the tax gap is not the premium

Illustration only—not a tax quote: Suppose a shareholder would net $8 million after a $10 million straight-stock price and an assumed $2 million combined tax. At the same $10 million price, a proposed 338(h)(10) allocation produces an assumed $2.35 million combined tax, leaving $7.65 million. The initial shortfall is $350,000. If the additional price would be taxed at an assumed 25% effective marginal rate, each extra dollar adds only 75 cents of after-tax proceeds. Holding all other assumptions fixed, a price increase of about $466,667 restores $350,000 of net proceeds ($466,667 × 75%).

That simplified result is a starting test, not a universal 4.7% premium. In an actual deal, the added price can shift the asset allocation and taxes; an earnout or escrow changes timing; different shareholders can have different stock bases and state exposure; liabilities and selling costs affect deemed proceeds; and a former C corporation may have entity-level built-in-gains tax. Recalculate after every material term change. A premium above the seller floor may be negotiated if the buyer values the basis step-up more highly; the buyer's tax benefit is not automatically the seller's entitlement.

What to collect before accepting the election clause

Letter of intent, purchase-agreement draft, price adjustments, debt payoff schedule, escrow, earnout, rollover equity, and selling-cost estimates.
Current and historic Forms 1120-S, shareholder K-1s, stock and debt-basis schedules, and any old C-corporation returns or built-in-gain records.
Fixed-asset and depreciation ledgers, receivables and inventory aging, intangible and goodwill support, proposed valuation, and draft Form 8883 allocation.
Ownership and signature roster for every S-corporation shareholder, closing date, and Form 8023 filing responsibility.
State filing footprint and the competing plain-stock and elected-sale after-tax models, by shareholder rather than only in the aggregate.

Failure points in an otherwise attractive offer

A fixed percentage gross-up: it can miss ordinary recapture, built-in-gains tax, state sourcing, or tax on the gross-up itself.
Only one shareholder modeled: different stock bases or residences can make an aggregate premium unfair even when the company-level total looks reasonable.
No allocation covenant: buyer and seller can later report inconsistent asset values, changing gain character and deductions.
Election promised before eligibility is checked: the purchaser must qualify, the stock-purchase threshold must be met, and every S shareholder must sign.
Closing without a deadline owner: Form 8023 timing and subsequent Form 8883/return reporting need assigned people and a post-closing cooperation clause.

This is a federal framework, not a filing position for every sale. AE should reconcile the actual deal documents, corporate history, state rules, and each shareholder's basis before the owners agree to a price or tax election.

Frequently Asked Questions

Is a 338(h)(10) election a stock sale or asset sale?

Legally it is a stock sale, but for federal income-tax purposes the target is generally treated as selling its assets and liquidating.

Can an individual buyer make a 338(h)(10) election?

A Section 338 election requires a corporate purchaser. Section 336(e) may be relevant in some qualifying transactions involving a noncorporate buyer.

How much more should an S corporation buyer pay for a 338(h)(10) election?

There is no standard percentage. Compare the seller's after-tax proceeds from a plain stock sale with the proposed deemed asset sale, then solve for the extra price needed to cover both the incremental tax and tax on the added price. Test the buyer's after-tax basis benefit separately.

The Buyer Wants a Section 338(h)(10) Election. How Much More Should They Pay?