What is a 338(h)(10) Election and How Does It Impact an M&A Transaction?

A Section 338(h)(10) election is a tax election that allows the buyer and seller of a target company to treat the sale as an asset sale for federal income tax purposes. This means that the buyer can take a basis in the assets of the target company equal to the purchase price, and the seller can recognize any gain or loss on the sale as if the assets were sold directly.

To make a Section 338(h)(10) election, the buyer and seller must file a joint election with the IRS within 75 days of the sale of the target company. The election must be made by both the buyer and the seller, and it must be approved by the IRS.

Once the election is approved, the buyer and seller must complete a detailed asset-by-asset allocation of the purchase price to reflect the fair market value of the assets acquired in the sale. This allocation is used to determine the gain or loss that the seller recognizes on the sale and the basis that the buyer takes in the assets.

Here are three potential benefits of a Section 338(h)(10) election for a business seller:

  1. Lower tax rate: Making a Section 338(h)(10) election allows the seller to recognize gain or loss on the sale of the assets of the target company as if they were sold directly, rather than recognizing gain or loss on the stock of the target company. This can result in a lower tax rate for the seller.
  2. Deferral of tax: A Section 338(h)(10) election may allow the seller to defer recognizing gain or loss on the sale of the assets until a later date, which can be beneficial if the seller expects to be in a lower tax bracket in the future.
  3. Simplified tax reporting: Making a Section 338(h)(10) election can simplify the tax reporting process for the seller, as it allows them to recognize gain or loss on the sale of the assets of the target company in a single transaction, rather than having to track the gain or loss on each individual asset. This can save time and reduce the potential for errors in tax reporting.

In general, a Section 338(h)(10) election can be beneficial for both the buyer and the seller. For the buyer, it allows them to take a higher basis in the assets of the target company, which can result in a lower tax bill when the assets are sold or depreciated in the future. For the seller, it allows them to recognize gain or loss on the sale of the assets as if they were sold directly, which can result in a lower tax rate compared to recognizing gain or loss on the stock of the target company.

However, making a Section 338(h)(10) election can be complex and requires careful planning and coordination between the buyer and the seller. It is important to consult with a tax professional before making this election to ensure that it is the right decision for your specific situation.

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