Tax basis step-up, explained simply
The saving has real value and influences the choice of structure. A step-up arises in an asset purchase and in a stock purchase with a Section 338(h)(10) or 336(e) election. For an S corporation, an F reorganization before the sale is commonly used. In a plain stock purchase the buyer inherits the seller’s historic basis.
Asset-sale treatment can cost some sellers more tax, particularly C corporations, so the benefit is often negotiated between the parties.
Tax basis before and after a step-up
IllustrativeAlder Creek Manufacturing, $ millions
A $28.8 million step-up, largely goodwill amortized over 15 years, yields about $1.92 million of annual deductions.
Availability by structure
| Structure | Step-up? |
|---|---|
| Asset purchase | Yes |
| Stock purchase | No: the buyer keeps the seller’s basis |
| Stock purchase with a Section 338(h)(10) or 336(e) election | Yes: treated as an asset sale for tax |
| S corporation with an F reorganization before the sale | Yes: commonly used |
Worked example
| Alder Creek, $ millions | Amount |
|---|---|
| Purchase price (enterprise value) | 36.8 |
| Seller’s existing tax basis in net assets | (8.0) |
| Step-up | 28.8 |
| Annual amortization over 15 years (mainly goodwill) | 1.92 |
| Federal tax saving at 21% | about 0.40 |
Alder Creek Manufacturing, Inc. is a fictional company. All figures are illustrative.
Over 15 years that is about $6 million of federal tax saving before discounting, which the buyer may share with the seller through price.
A note
This page explains general concepts and is not legal or tax advice. Rules vary by jurisdiction and change over time.
Why it matters in a deal
The step-up can be worth a meaningful share of price, which is why structure is negotiated with both sides’ after-tax outcomes in view.
Red flags
- Structure chosen without modeling the after-tax effect for both sides
- S corporation status that may be invalid, which can block an election