Tax Implications of Business Acquisitions: Asset Purchase vs. Stock Purchase, IRC 338 Elections, and Due Diligence

By Yarik Yarosh, CPA ·September 5, 2026 ·7 min read

Written by Yarik Yarosh, CPA (US & Canada) September 5, 2026 · FL CPA license AC61704 · CPA Ontario

The structure of a business acquisition (asset deal vs. stock/equity deal) is the single most consequential tax decision in the transaction, often worth hundreds of thousands of dollars in present-value tax savings to the buyer, and it is the primary negotiating point between buyer and seller because their tax interests are directly opposed. The buyer wants an asset purchase (to get a stepped-up basis and maximize future depreciation and amortization deductions), while the seller wants a stock sale (to get long-term capital gains treatment on the entire proceeds). Under IRC 1060, the purchase price in an asset acquisition is allocated among seven classes of assets using the residual method, with any excess purchase price over the fair market value of all identifiable assets allocated to goodwill (Class VII), which is amortizable over 15 years under IRC 197. The buyer and seller must both report the same allocation on Form 8594 (Asset Acquisition Statement), filed with their respective tax returns.

✓Key takeaway

Asset purchase vs. stock purchase comparison:

Factor	Asset Purchase	Stock Purchase
What the buyer acquires	Individual assets and specified liabilities	Shares/membership interests in the entity
Buyer’s basis in assets	Stepped-up to purchase price (allocated per IRC 1060)	Carryover (seller’s existing basis)
Depreciation/amortization for buyer	Full purchase price (including goodwill, 15-year IRC 197)	Only on seller’s remaining basis
Seller’s tax treatment	Mixed: ordinary income on recapture, inventory, AR; capital gains on goodwill	All capital gains (if held > 1 year)
Liabilities	Buyer assumes only specified liabilities	Buyer assumes ALL entity liabilities (known and unknown)
Contracts, licenses, permits	Must be reassigned (may require third-party consent)	Stay with entity (no reassignment needed)
Employment tax ID (EIN)	Buyer needs new EIN	Entity keeps existing EIN
Non-compete agreements	Separately valued; amortized 15 years (IRC 197)	Not applicable
Sales tax	Many states charge sales tax on asset transfers	Generally no sales tax on stock sales
Employee transition	Employees are terminated and rehired (restart FUTA/SUTA wage base)	Employees stay with entity (no restart)

IRC 1060 purchase price allocation (residual method):

Class	Asset Type	Tax Treatment for Buyer
I	Cash and cash equivalents	No depreciation
II	Actively traded securities, CDs, foreign currency	No depreciation
III	Accounts receivable, mortgages, credit card receivables	Collected (ordinary income matching)
IV	Inventory	COGS (deducted when sold)
V	All other tangible and intangible assets not in other classes	MACRS depreciation / Section 179 / bonus
VI	Section 197 intangibles (except goodwill and going concern)	15-year amortization
VII	Goodwill and going concern value (residual)	15-year amortization (IRC 197)

How do asset and stock deals differ in practice?

Hypothetical example

Round numbers. A buyer purchases a manufacturing business for $3,000,000.

Asset purchase allocation (IRC 1060):

Asset Class	FMV	Buyer’s Treatment
Inventory (Class IV)	$200,000	COGS when sold
Equipment and machinery (Class V)	$400,000	100% bonus depreciation (Year 1)
Vehicles (Class V)	$100,000	100% bonus depreciation (Year 1)
Customer list (Class VI, IRC 197)	$300,000	15-year amortization ($20,000/year)
Non-compete agreement (Class VI, IRC 197)	$200,000	15-year amortization ($13,333/year)
Trade name / brand (Class VI, IRC 197)	$100,000	15-year amortization ($6,667/year)
Goodwill (Class VII, residual)	$1,700,000	15-year amortization ($113,333/year)
Total	$3,000,000

Buyer’s Year 1 deductions from the acquisition:

Deduction	Amount
Equipment bonus depreciation	$400,000
Vehicle bonus depreciation	$100,000
Goodwill amortization (Year 1, $1.7M / 15)	$113,333
Customer list amortization ($300K / 15)	$20,000
Non-compete amortization ($200K / 15)	$13,333
Trade name amortization ($100K / 15)	$6,667
Total Year 1 deductions	$653,333
Tax savings (37%)	$241,733

Annual amortization deductions (Years 2-15):

Deduction	Annual Amount
Goodwill	$113,333
Customer list	$20,000
Non-compete	$13,333
Trade name	$6,667
Total annual amortization	$153,333
Annual tax savings (37%)	$56,733

Present value of all deductions over 15 years (5% discount rate):

The total tax benefit of the step-up in an asset deal is approximately $800,000 in present value, which means the buyer should be willing to pay $800,000 more in an asset deal than in a stock deal (all else equal).

Stock purchase (same business, $3,000,000):

Item	Treatment
Buyer’s basis in stock	$3,000,000 (in the shares, not the assets)
Basis in individual assets	Carryover (seller’s existing depreciated basis)
Equipment (original cost $600K, accumulated depreciation $400K)	$200,000 basis remaining
Goodwill on the books	$0 (internally generated, never capitalized)
Year 1 deductions from acquisition	$0 (plus remaining MACRS on old assets)

The buyer gets no step-up, no goodwill amortization, and no bonus depreciation on assets that are already partially or fully depreciated.

Seller’s tax comparison:

Seller’s original basis in assets: $500,000. Sale price: $3,000,000. Gain: $2,500,000.

Component	Asset Sale	Stock Sale
Inventory gain ($200K - $100K cost)	$100,000 (ordinary income, 37%) = $37,000 tax	N/A
Equipment recapture ($400K - $200K basis)	$200,000 (ordinary income, IRC 1245) = $74,000 tax	N/A
Vehicle recapture ($100K - $0 basis)	$100,000 (ordinary income) = $37,000 tax	N/A
Intangibles + goodwill ($2,300K - $200K basis)	$2,100,000 (LTCG, 20% + 3.8% NIIT) = $499,800 tax	N/A
All stock gain ($3M - $500K basis)	N/A	$2,500,000 (LTCG) = $595,000 tax
Total seller tax	$647,800	$595,000
Seller prefers		Stock sale (saves $52,800)

The seller saves $52,800 in this example by doing a stock sale, while the buyer saves approximately $800,000 (PV) by doing an asset deal. The net benefit of an asset deal is approximately $747,200, which means the parties should negotiate a higher price in the asset deal to compensate the seller for the worse tax treatment.

IRC 338(h)(10) election (S-Corp or consolidated group):

For S-Corp acquisitions, the IRC 338(h)(10) election allows the parties to treat a stock purchase as an asset purchase for tax purposes:

Factor	Without 338(h)(10)	With 338(h)(10)
Legal form	Stock purchase	Stock purchase (same)
Tax treatment (buyer)	Stock purchase (no step-up)	Deemed asset purchase (full step-up)
Tax treatment (seller)	Capital gains on stock sale	Deemed asset sale (mixed ordinary/capital)
Entity continues	Yes	Yes (same EIN, contracts, licenses)
Liabilities	Buyer assumes all	Buyer assumes all (same)
Best for	Seller	Buyer (but both agree because the deal retains legal form of stock purchase)

The 338(h)(10) election is the most common structure for S-Corp acquisitions because it gives the buyer the step-up (the buyer’s primary concern) while keeping the legal form of a stock purchase (preserving contracts, licenses, and avoiding consent requirements). The seller accepts the mixed ordinary/capital treatment because the buyer typically pays a higher price to reflect the step-up value.

Due diligence tax items:

Area	What to Review	Risk
Tax returns (3-5 years)	Accuracy of reporting, consistency	Understated income, overstated deductions
Payroll tax compliance	941s, W-2s, 1099s, worker classification	Misclassification liability
Sales tax	Nexus states, collection history	Uncollected sales tax liability
State income tax	Multi-state filing positions	Unfiled returns, understated tax
IRC 382 NOL limitations	If target has NOLs and ownership change > 50%	NOL usage limited post-acquisition
Pending audits or disputes	IRS or state correspondence	Contingent liabilities
Employment agreements	Deferred compensation, change-of-control provisions	IRC 409A penalties, golden parachute
Environmental liabilities	Contamination history	Remediation costs (deductible under IRC 162)

Illustrative numbers only, not a real client and not advice for your facts.

Want this checked against your own situation?

Start with a Diagnostic: a CPA licensed in the US and Canada reads your file and tells you in writing what's wrong and how to fix it, three to four business days after you finish the questions. The report is $250. If you hire us for any work after that, you get the $250 back as a discount on that work. Or send us your return or your letter and get a fixed price, free.

Start a Diagnostic →See prices

Get a fixed price, free

Get the next cross-border guide by email

One or two plain-English guides a week on US-Canada tax. No spam, unsubscribe anytime.

Cite this page

Yarik Yarosh, CPA. "Tax Implications of Business Acquisitions: Asset Purchase vs. Stock Purchase, IRC 338 Elections, and Due Diligence." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-tax-implications-asset-vs-stock-acquisition-338-election

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.

Tax Implications of Business Acquisitions: Asset Purchase vs. Stock Purchase, IRC 338 Elections, and Due Diligence

How do asset and stock deals differ in practice?

Related guides