Section 338(h)(10) Election: Cost, Deadline and Who Actually Qualifies

Short answer: A section 338(h)(10) election lets a buyer purchase the stock of an S corporation and be taxed as though it bought the assets, so the buyer gets a stepped-up basis and fifteen year amortization on the intangibles instead of inheriting the seller's old basis. It is a joint election, it is irrevocable, and it must be filed on Form 8023 no later than the 15th day of the 9th month beginning after the month of the acquisition date. The requirement that disqualifies most small buyers is not the deadline. It is that the purchaser has to be a corporation, and most people buying a small US business today buy through an LLC. Last updated September 2026. Educational only, not tax or legal advice.

The one requirement that rules out most small buyers

Start here, because it decides whether the rest of this page applies to you at all. Section 338(d)(3) defines a qualified stock purchase as a transaction or series of transactions in which stock meeting the requirements of section 1504(a)(2) of one corporation "is acquired by another corporation by purchase during the 12-month acquisition period." Section 338(d)(1) then defines the purchasing corporation as "any corporation which makes a qualified stock purchase of stock of another corporation."

Read those two definitions together and the answer is blunt. The buyer must be a corporation. A single member LLC cannot make the election. Nor can an individual buying in their own name, nor a partnership, nor a fund structured as an LP. This is the detail that gets discovered late, usually after the letter of intent has already promised the seller a stock sale and promised the buyer a step-up, and it is not fixable by amending the purchase agreement. It is fixable only by changing the acquiring entity before closing, which is a decision to make in week one rather than week nine.

An S corporation can be the purchaser, and so can a C corporation. An LLC that has elected to be taxed as a corporation is treated as a corporation for this purpose. So the practical move for a buyer who wants the step-up is to form or elect a corporate acquisition vehicle early, and to check it against the lender's requirements at the same time, because an SBA 7(a) buyer has its own constraints on entity structure and personal guarantees.

Section 338(h)(10) election requirements, from the statute and the form

These were read on 9 September 2026 from 26 USC 338 at law.cornell.edu and from Form 8023, revision October 2023, at irs.gov.

Two of those rows carry more weight than the others. The 80% test comes from section 1504(a)(2) and is a test of both voting power and value, so a buyer taking 79% of the equity has no election available no matter how the deal is described. And the deadline in section 338(g)(1) is measured from the acquisition date, not from the tax year end: not later than the 15th day of the 9th month beginning after the month in which the acquisition date occurs. For a deal closing in March, that is 15 December of the same year. Section 338(g)(3) then states that an election, once made, is irrevocable.

Every S corporation shareholder has to sign, and that is a real risk

Form 8023 has three separate signature blocks. One is for the purchasing corporation. One is for the common parent of a selling consolidated group or a selling affiliate. The third is headed "S Corporation Shareholder(s) Signature(s)" and carries the instruction that if more than one shareholder, attach a schedule with other signatures.

That is not a formality. On an S corporation target, the election requires the signature of every shareholder, including the former employee holding two percent who left on bad terms four years ago and the ex-spouse who received shares in a divorce settlement. Any one of them can refuse. And they have a reason to refuse, because the election is usually worse for them than a plain stock sale, which is the subject of the next section.

The time to find this out is during diligence on the capitalization table, not in November when the filing deadline is closing. Ask for the full shareholder list and the stock transfer ledger early, confirm the S election has been valid continuously, and get signature commitments written into the purchase agreement as a closing condition rather than a promise to cooperate afterward.

What the step-up is actually worth to a buyer

The election works by treating the target as having sold all of its assets at fair market value and then liquidated. The buyer ends up holding a company whose assets carry a fresh basis equal to the deemed purchase price, allocated across asset classes under the residual method. On a small software or services business the great majority of the price lands in goodwill and going concern value, which is a section 197 intangible amortizable on a straight line basis over fifteen years.

Here is the arithmetic on a $3,000,000 acquisition where $2,400,000 of the price is allocated to goodwill. That is our calculation, not a published figure, and it assumes the buyer has taxable income to absorb the deduction:

Half a million dollars of nominal tax relief on a three million dollar deal is meaningful, and it is why buyers push for this structure. But three caveats decide whether the number is real. The relief arrives over fifteen years, so its present value is materially lower than the nominal total, and at a 10% discount rate the $504,000 is worth somewhere near $255,000 today by our arithmetic. The buyer needs taxable income to use the deduction, which a leveraged acquisition may not generate in early years. And the allocation is a negotiated document filed by both sides on Form 8594, so the goodwill figure is not the buyer's to choose alone. Getting that allocation right is a separate piece of work, covered on our page about purchase price allocation and Form 8594.

Why the seller will ask you to gross them up

The election is not free to the seller, and a seller who understands it will price that in. In a plain stock sale, an S corporation shareholder generally recognizes long term capital gain on the difference between the sale price and their stock basis. With the election, the transaction is recharacterized as a sale of assets by the corporation, and the character of the gain follows the assets. Depreciation recapture on equipment becomes ordinary income. Gain attributable to certain other assets can also fall out of capital treatment. For a target with meaningful depreciated fixed assets, the difference between capital and ordinary rates on that slice is the whole argument.

There is a second cost that catches sellers by surprise: state tax. A deemed asset sale can create taxable presence and apportionment questions in states where the corporation operated, and those state consequences do not always follow the federal characterization. The result in practice is a "gross-up" negotiation, where the seller quantifies the incremental tax caused by the election and asks the buyer to increase the price by enough to leave them in the same after-tax position. That is a legitimate ask. The deal only makes sense for the buyer if the present value of the step-up exceeds the gross-up the seller demands, and on a business with few depreciable assets it usually does, while on an equipment-heavy business it often does not.

Model both sides before you raise the election in negotiation. A buyer who asks for it, discovers the gross-up is $180,000, and then withdraws the request has spent credibility for nothing.

Is a 338(h)(10) election better than an F reorganization?

They solve the same problem and they fail in different places. Both give the buyer asset treatment on the purchase of an S corporation. The 338(h)(10) election requires a corporate buyer, an 80% purchase and a valid S election that has survived every transfer in the company's history. An F reorganization restructures the target before the sale into a holding company with the operating entity beneath it, and the buyer then purchases interests in a disregarded entity, which achieves asset treatment without needing the buyer to be a corporation and without requiring 80% in a single transaction.

That last point is why the F reorganization has become the more common route on small deals. It permits a rollover, where the seller keeps a minority stake in the new structure, which the 80% test makes awkward under 338(h)(10). It also does not depend on the target's S election having been flawless, because the restructuring itself surfaces and can repair certain historical defects. The trade is timing and cost: an F reorganization is pre-sale work that has to happen before the documents are drafted, whereas the election is a form filed after closing.

How much does a 338(h)(10) election cost to implement?

No firm publishes a fixed price for this and we are not going to invent one. Form 8023 itself is a two page form and costs nothing to file. The cost is in the analysis around it: modeling the buyer benefit and the seller gross-up, negotiating the purchase price allocation, and drafting the tax provisions of the purchase agreement that require every shareholder to sign. That is corporate tax work, and ContractsCounsel's published hourly ladder, read on 26 and 31 August 2026, ran from $250 to $400 an hour for a business or corporate lawyer up to $700 to $1,200 an hour for a large firm partner. The variable that drives the total is the number of shareholders and the number of states involved, not the size of the price.

Common questions

What is a 338(h)(10) election? It is a joint election that lets a stock purchase be taxed as an asset purchase. The target is treated as having sold its assets at fair market value and liquidated, so the buyer takes a stepped-up basis in those assets while the legal form of the deal stays a purchase of stock.

Who can make a 338(h)(10) election? A corporate buyer making a qualified stock purchase of at least 80% of the vote and value of an S corporation, or of a target that is a member of a selling consolidated group or a selling affiliate. The buyer cannot be an individual, an LLC taxed as a partnership, or a partnership.

When is the 338(h)(10) election due? Section 338(g)(1) sets the deadline at not later than the 15th day of the 9th month beginning after the month in which the acquisition date occurs. It is filed on Form 8023 and it is irrevocable once made.

Does a 338(h)(10) election cost the seller money? Usually yes. Recharacterizing the sale as an asset sale converts part of the seller's gain from capital to ordinary income, most often through depreciation recapture, and can create additional state tax. Sellers routinely ask the buyer to raise the price to offset it.

Can you make a 338(h)(10) election if you buy through an LLC? Not if the LLC is taxed as a partnership or is disregarded. The purchaser must be a corporation under section 338(d)(1). An LLC that has elected corporate tax treatment qualifies, which is the usual fix when the point is caught before closing.

Where this fits in a live deal

Structure decisions like this one are cheap to make early and expensive to make late. The sequence that works is to settle the acquisition entity before the letter of intent, confirm the shareholder list and S election history during diligence, model the buyer benefit against the seller gross-up before the price is fixed, and negotiate the purchase price allocation as part of the purchase agreement rather than leaving it for the accountants afterward. Every one of those steps depends on having financial statements you can actually rely on, which for a small company usually means turning a bookkeeping export into clean, board-ready financial statements before anyone starts allocating a purchase price across asset classes.

It also depends on knowing what you are buying. Buyouts is a marketplace for AI SaaS businesses where MRR, ARR, growth and churn are verified before a listing goes live, so the revenue figures a step-up calculation is built on have been checked rather than asserted. Browsing is free and buyer membership is planned rather than currently on sale. If you are earlier in the process, our guide to how to buy a business covers the stages before structure, and the choice between the two basic deal shapes is set out in asset purchase versus stock purchase for a software deal. Where the seller is carrying part of the price, the tax mechanics are on our page about the installment sale of a business.

Nothing on this page is tax or legal advice. Section 338 is one of the more fact-specific corners of the code and the right answer depends on the target's entity history, its asset mix, its states and each shareholder's own position.