Easily Understanding Section 338(h)(10) Elections
The first thing to understand when learning about a Section 338(h)(10) Election is what exactly it is. A 338(h)(10) is a tax election for a qualified stock purchase between a buyer and a seller of an S-corporation that recharacterizes a stock purchase as an asset purchase for any federal tax purpose. RKLCPA. For all other legal purposes though, it remains a stock purchase.
So, what are some of the pros to this instead of just doing a normal stock purchase? In this situation, a buyer receives a tax basis that is equivalent to the purchase price. The tax benefits would almost be immediate. For the seller though, this is seen more to get the deal to finally close as a compromise. RKLCPA. But on the other hand, it could also bring a higher purchase price.
To begin, once the buyer creates a new corporation then they buy the assets of the corporation they are planning on buying which causes it to liquidate. Bloomberg. Thus, the stock sale is ignored and is deemed tax-free. Since for legal purposes it is seen as a stock purchase, that means that all liabilities are transferred and not just some liabilities that are gained by assets. These types of elections can become very complex and can be hard to figure out when the perfect time to make the election may be.
Are you selling or buying a business and not sure where to begin or if you qualify for a proper Section 338(h)(10)? Reach out to the Professionals at The Center for Financial, Legal, & Tax Planning Inc. at (618) 997-3436.