THE BARATELLI INSTITUTE · Mentoring at Scale
FOR SELLERS, BUYERS, AND THEIR M&A COUNSEL

Asset sale vs. stock sale. The single most-mispriced negotiation in middle-market M&A.

Buyers want asset sales (basis step-up = present-value of future depreciation deductions). Sellers want stock sales (single layer of long-term capital gain instead of double-tax + ordinary recapture). The §338(h)(10) election bridges the gap. The math here tells you who pays what — and what gross-up the seller should demand to be made whole.

8-15%
Typical step-up benefit
§338(h)(10)
S-corp election modeled
§1060
Allocation framework
2x
C-corp double-tax modeled
YOUR DEAL
1
Entity & basis
2
Purchase price & allocation
3
Tax positions
4
Buyer step-up value
5
Structure decision
STAGE 1 OF 5

Entity type & tax basis

Defaults model an S-corp founder selling a $10M services business with $1M of inside basis. Most middle-market deals look something like this.

Drives the entire decision. C-corp asset sale = double tax (corporate + shareholder dividend). S-corp / LLC asset sale = single tax. §338(h)(10) only available for S-corps and qualifying corporate subsidiaries.
For S-corps converted from C-corps, the "built-in gains" tax (§1374) applies for 5 years post-conversion at 21% federal rate on appreciation accrued during C-corp years. Set 0 if always-S or N/A.
For S-corp/LLC owners: original capital + cumulative income recognized − distributions. For C-corp: original cost basis. This is the seller's tax basis in the equity, used for stock-sale capital gain computation.
$
Aggregate tax basis of the company's assets net of liabilities. Used for asset-sale gain computation. Typically much lower than outside basis for mature businesses (depreciation has reduced asset basis).
$
The structure preference, in one sentence. Buyer wants to deduct $10M of depreciable basis over 15 years; seller wants to pay 23.8% LTCG on stock instead of 23.8% on capital + 37% on inventory/recapture + (possibly) 21% corporate-level tax for C-corps. The buyer is willing to pay the seller a "gross-up" to capture some of that asymmetry. The math here tells you the size of the gross-up.
STAGE 2 OF 5

Purchase price & §1060 allocation

In an asset sale (or §338(h)(10) deemed asset sale), the price must be allocated across asset classes. Each class has different tax consequences — ordinary vs. capital, recapture, amortization period.

The gross deal value. For stock sale, the price for 100% of equity. For asset sale, the price the buyer pays for the assets. Net of any working-capital adjustment.
$
Inventory sells at fair value above its tax basis = ordinary income (not capital). For services businesses, typically $0. For distributors / e-com, can be 15-30% of price.
$
For cash-method sellers (most CPA firms, law firms, small services), uncollected AR transferred at sale = ordinary income to seller. For accrual-method, already on books.
$
Tax basis of §1245 property (equipment, computers). Sale at fair value above basis triggers ordinary-income recapture under §1245 — not capital gain. For most service businesses, this is small.
$
Step-up potential and recapture risk. If FMV exceeds basis (typical for fully-depreciated equipment), the spread is §1245 ordinary recapture in asset sale. Set equal to basis if no markup.
$
Buildings, structural improvements. §1250 unrecaptured-depreciation taxed at 25% federal max for individuals on prior-depreciation portion; the rest is LTCG. Set 0 if no real property.
$
Why §1060 allocation is a fight. The IRS requires buyer and seller to file matching Form 8594 allocations. Seller wants more allocated to goodwill (LTCG) and less to equipment (ordinary recapture); buyer wants more allocated to equipment + inventory (5-7 year recovery) and less to goodwill (15-year amortization). The negotiated allocation usually splits the difference; the residual after specific assets is goodwill / going-concern value.
STAGE 3 OF 5

Tax positions

Federal and state rates determine the actual gap between the structures. C-corp double-tax, individual LTCG, NIIT, and state income tax all enter here.

Applies to capital gain on stock sale and the goodwill / capital portion of asset sale. Top federal LTCG is 20% for AGI above $533K single / $600K MFJ in 2025; 15% below; 0% at lowest income. Plus NIIT 3.8%.
Applies to AR (cash-method), inventory above cost, §1245 recapture on equipment, and any earnouts treated as compensation.
State income tax applies to most of the gain, capital and ordinary alike. No-tax states (FL, TX, TN, NV, WA) save the seller meaningfully. CA at 13.3% adds 13 points of cost on the entire gain.
3.8% surtax on net investment income for AGI above $200K single / $250K MFJ. Applies to capital gain (most sellers). Does NOT apply to gain from active-trade-or-business interests (S-corp/LLC operating gain) — but does apply to passive interests and to most installment-sale interest. Default yes.
Used to value the buyer's step-up benefit. Federal C-corp rate is 21%. Most strategic buyers and PE-portfolio buyers use 21%. Pass-through buyers (rare for $5M+ deals) use seller's individual rate.
Used to discount the future depreciation tax shield. Strategic buyers: 8-10%. PE-backed: 12-15%. Lower discount rate = higher value of step-up = larger gross-up the buyer can offer.
%
STAGE 4 OF 5

Buyer's step-up benefit & gross-up offer

In an asset sale (or §338(h)(10) deemed asset sale), the buyer steps up basis to FMV and amortizes/depreciates against ordinary income. That tax shield has present value, which is the maximum the buyer would rationally pay above stock-sale price.

§197 intangibles (goodwill, customer lists, non-competes, going-concern value, workforce in place) amortize ratably over 15 years.
5-year MACRS for most equipment; 7-year for furniture/fixtures. With §168(k) 100% bonus depreciation restored under OBBBA, equipment is fully written off in year 1.
Empirical norm in middle-market: 30-50% of step-up benefit shared with seller as a "gross-up" addition to purchase price. Buyer keeps the rest. Highly negotiated. Sophisticated PE buyers will fight to give 0%; sophisticated sellers can extract 50-70%.
%
Available only for S-corporation targets and certain corporate-subsidiary targets where seller is a corporation. Both buyer and seller must consent (joint election on Form 8023). LLCs taxed as partnerships use direct asset sale (no §338 needed). Auto-set based on entity, but you can override.
Why §338(h)(10) is the elegant compromise. The buyer wanted a stock sale for legal simplicity (one transaction, no asset-by-asset transfer of contracts and licenses) but also wanted asset-sale tax treatment (basis step-up). The seller wanted single-layer tax (S-corp single LTCG) but the buyer's stock-sale offer left value on the table. The §338(h)(10) election gets both: legally a stock sale, taxably a deemed asset sale, with the buyer paying a gross-up to compensate the seller for the (typically modest) increase in tax cost.
STAGE 5 OF 5 · DECISION

Asset sale vs. stock sale vs. §338(h)(10)

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Pure stock sale — seller net
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Pure asset sale — seller net
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§338(h)(10) with gross-up
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§1060 allocation (asset sale)

Asset-sale waterfall — gross to seller-net

Buyer's step-up benefit (PV of future tax shield)

All three structures side-by-side

Decision metrics

Recommendations

FOR BUYERS — PAIRS WITH THE BUSINESS BUYER'S GUIDE
Business Buyer's Guide · SBA Financing Tool · Working Capital Peg · §382 NOL Limitation
The deal-structure decision affects the buyer's basis step-up benefit, the SBA underwriting case, the working-capital peg setting, and the §382 NOL transferability. Run all four tools together for the full buyer-side picture. The Business Buyer's Guide is the umbrella playbook covering search, LOI, QofE, deal structure (this tool), WC peg, escrow, transition, and the 100-day operating plan. Subscribe to the library →
FOR SELLERS — PAIRS WITH THE LIQUIDITY EVENT PLAYBOOK
Liquidity Event Playbook · Solo M&A Banker · QSBS Calculator
The Liquidity Event Playbook covers the full sale-process timeline. The Solo M&A Banker chapter on deal structure includes the negotiation script for the gross-up demand. If your S-corp converted from C-corp within 5 years, also run the built-in gains tax through the QSBS Calculator's basis section.
LIQUIDITY EVENT PLAYBOOK

Deal structure is one of seven decisions in a sale. Get the full playbook.

LOI negotiation, working-capital peg, escrow / indemnification, R&W insurance, earnout vs. seller note, post-closing transition, tax-aware liquidity sequencing.

Deal structure is a heavily fact-specific tax decision. The model uses simplified assumptions about §1060 residual allocation (residual to goodwill), single-step recapture (§1245 ordinary; §1250 25% on prior-depreciation), and a flat federal C-corp rate (21%). It does not separately model: built-in gains tax (§1374) for recently-converted S-corps, S-corp anti-churning rules under §197, F-reorganization alternatives, partnership §754 elections, installment-sale treatment under §453, employment-tax treatment of earnouts, or state-specific gain-allocation rules (some states tax non-residents on the gain from in-state business sale). Engage M&A tax counsel and a deal CPA for any actual transaction. This is not tax advice.
WANT THE METHODOLOGY BEHIND THIS TOOL?
This calculator is one chapter of The Liquidity Event Playbook.
The tool gives you the answer. The guide gives you the argument — the case law, the worked examples, the negotiation playbook, the cross-check tables, the exception cases. Read the chapter and you can defend your number to a board, a buyer, an examiner, or a counterparty.
The methodology behind this calculator is in Ch 12 Asset vs Stock Sale of the reference guide.
See the Guide → Browse all 22 guides
PROFESSIONAL DISCLAIMER · PLEASE READ

Educational and informational purposes only. This calculator and any output it produces are intended solely for general educational and decision-support purposes. They do not constitute investment, tax, legal, accounting, appraisal, lending, insurance, or any other professional advice, and they do not create a fiduciary, attorney-client, accountant-client, or advisor-client relationship of any kind.

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