Buying a Business: Asset Purchase vs. Stock Purchase

How it works

Two facts decide almost everything about how a business purchase gets taxed: what form the deal takes, asset or stock, and what the target's entity type is. Get those right and the price allocation, the amortization schedule, and the target's tax history all follow mechanically.

In an asset purchase, the buyer acquires specific assets, and only the liabilities it agrees to assume, and takes a cost basis under Section 1012 in each one, allocated across the deal under the residual method of Section 1060. That fresh basis starts depreciating or amortizing immediately. In a stock purchase, the buyer instead acquires the ownership interest itself; the target keeps its assets at their existing, carryover basis, no step-up, and the buyer inherits the target's tax history along with it, including, subject to a limit described below, its net operating loss and credit carryforwards.

A buyer will almost always prefer the asset route. Every dollar paid above the seller's old basis becomes new, depreciable or amortizable basis at fair value: tangible property eligible for immediate expensing under 100% bonus depreciation, permanent for property acquired after January 19, 2025 under the One Big Beautiful Bill Act, or under Section 179, and acquired intangibles amortizing over fifteen years under Section 197 instead of sitting in the seller's often-depleted basis. An asset buyer also selects which liabilities it assumes and leaves the seller's own historic tax exposure behind, where a stock buyer inherits all of it outright.

What a buyer gives up is real but is not a tax cost: contracts, leases, licenses, and permits are often not automatically assignable, a timing friction that is frequently the real reason a deal ends up structured as stock instead. An asset deal also usually costs the seller more tax, so sellers push for a higher price or a stock deal, which the election family below exists to resolve.

The seven-class allocation

Every asset purchase, and every deemed asset sale under an election below, splits the price across seven classes under the residual method; cash, securities, and inventory rarely decide anything, so the real contest is in the last three.

A dollar in Class VI and a dollar in Class VII cost the buyer identical amortization, so a buyer has almost nothing at stake in how the intangible pool gets split. The asymmetry that survives sits on the seller's side: a covenant is ordinary income to the seller, while self-created goodwill and a client list are capital gain, so a seller fights to shrink the covenant and grow the rest. A buyer, indifferent under Section 197, can usually give the seller this for free, as long as the covenant that remains is real enough to survive a challenge (see Where it goes wrong).

The election family that makes a stock deal act like an asset deal

Three elections let a stock purchase reach the same asset-basis result. Section 338(g) is unilateral, available to a corporate buyer completing a qualified stock purchase, at least 80% by vote and value within twelve months, of any corporate target, though against a standalone C corporation it usually is not worth it (see Where it goes wrong). Section 338(h)(10) is the workhorse instead: a joint election for an S corporation target, with every shareholder's consent, or an 80%-owned member of a selling consolidated group. The gain generally lands on a single return, but "no corporate-level tax" is not something to promise an S corporation seller. Where the target was once a C corporation and is still inside the five-year recognition period, Section 1374 taxes net recognized built-in gain at the corporate level, including the gain sitting in a LIFO reserve. That is the most expensive surprise in this structure. Section 1363(d) LIFO recapture is a different charge and does not belong on a closing checklist: it falls in the last C-corporation year, when the S election is made, payable in four installments, so by the time a deal closes it has either already run years earlier or never applied at all. Section 336(e) fills the gap when the buyer is not a single corporation at all: the seller elects it on the same standard, and the buyer's consent is not required.

All three reach the same stepped-up basis without re-titling every asset, but the seller-side versions need the seller's cooperation and usually cost more, so eligibility is worth confirming during diligence, not assumed later.

A Florida lens

Florida has no individual income tax and, for a pass-through entity, no entity-level income tax either, so almost all of a buyer's income-tax analysis here is federal. A Florida C corporation buyer is the exception, owing Florida's own 5.5% corporate income tax on its post-acquisition earnings; Florida's other exposure is narrow and non-income-tax, covered under what it requires, below.

Who this applies to

The buyer's toolkit is gated by the target's own entity type and the deal's structure, not a single eligibility test.

• Any buyer, of any target entity type, in a straight asset purchase. Cost basis allocated under the residual method, tangible property expensed immediately, intangibles amortized over fifteen years.
• A corporate buyer completing a qualified stock purchase of any corporate target. Can elect under Section 338(g) alone, though rarely worth it against a standalone C corporation.
• A corporate buyer completing a qualified stock purchase of an S corporation, or of an 80%-owned member of a selling consolidated group. Reaches the same step-up through the joint Section 338(h)(10) election, with every S corporation shareholder's consent.
• An unrelated buyer, acquiring at least 80% by vote and value of a domestic corporate target within twelve months. The seller elects under Section 336(e); the buyer's consent is not required and the buyer need not be a corporation. Relatedness is the limit that catches family and management deals: Treas. Reg. 1.336-1(b)(5)(i)(C) counts a disposition only if the stock is not sold to a related person, tested under the Section 318(a) attribution rules, so a sale to a related buyer does not count toward the 80%. The seller side is bounded too, to a domestic corporate seller or the shareholders of an S corporation.
• Any buyer meeting the small-business gross-receipts test under Section 448(c). Exempt from the interest-deduction cap described below.

A stock purchase also carries the target's historic net operating loss and credit carryforwards along with the stock, but an ownership change, a rise of more than 50 percentage points in 5%-or-greater shareholders' aggregate ownership over the testing period, caps how fast those losses can be used under Section 382, to the target's pre-change value times a long-term tax-exempt rate the IRS publishes monthly. For a modest-sized target, that annual cap is often small enough that a large loss balance times out unused, so it should never be priced into an offer at face value. And a buyer who assumes every contract, lease, and license will transfer automatically in an asset deal is often wrong; third-party consent is frequently required, a negotiation problem, not a tax one.

Whether the target, or the buyer, should even be organized as an S corporation in the first place is a separate question, and one I look at in my Florida S-corp guide.

What it requires

A handful of facts have to be nailed down before signing, since the deal's form, any election, and the price allocation are fixed in the purchase agreement and unavailable after closing.

• A purchase-price allocation agreed in the purchase agreement itself, not derived later. Both sides file matching numbers, Form 8594 for a straight asset purchase or Form 8883 for a deemed asset sale; a written allocation binds both sides but not the IRS, which can challenge either side's figures regardless of what was filed.
• A Form 8023 election, if the deal uses one, filed by an irrevocable deadline. Due the 15th day of the ninth month after the acquisition-date month, with no relief in the statute for a late filing.
• No anti-churning exposure on a related-party leg of the deal. Section 197 amortization is denied on an intangible the buyer, or a related person, held or used at any time between July 25, 1991 and August 10, 1993, dead for an arm's-length deal today but a real trap in an intra-family sale or partner buyout.
• The acquisition debt's interest checked against the Section 163(j) cap. Deductible only up to business interest income plus 30% of adjusted taxable income, computed on an EBITDA basis, so this acquisition's own depreciation and amortization do not shrink the room to deduct the debt that funded it. The addback keeps that Section 197 amortization neutral rather than adding capacity, which matters when modelling a step-up-heavy deal: the amortization the step-up creates buys no extra interest deduction. Floor-plan financing interest is outside the cap. A buyer meeting the Section 448(c) test skips the cap.
• A Section 382 computation, run before a target's loss carryforwards are priced into the offer. The gap between a realistic number and the seller's pitch is usually wide.
• Florida's closing list cleared, on a deal transferring the business. A DR-843, the purchaser's application for a transferee liability certificate, or the seller's DR-842, filed before closing on a transfer of more than half the business, its assets, or its inventory. Both are applications for an audit rather than the certificate itself, and Florida returns the certificate only to the seller, so a buyer has to get it from them. Also Florida's documentary stamp tax on a seller note, $0.35 per $100 of face amount. The familiar $2,450 ceiling is in Fla. Stat. 201.08(1)(a) and reaches an unsecured note only. A note whose security agreement or mortgage is filed or recorded in Florida falls under 201.08(1)(b), which carries the same rate and no cap at all, so a large secured seller note is the case where this stops being a rounding error.

What you need to document

The signed purchase-price allocation

The Form 8594 or 8883 both sides filed, matching, plus the allocation language from the purchase agreement, showing it was a negotiated price term rather than a number produced later at filing season.

Support for a covenant's value, if the deal carries one

A contemporaneous valuation, or a comparison to what similar deals paid for a similar covenant, since the IRS's actual challenge runs through whether the price is honest and the covenant is genuinely restrictive.

The election paperwork and its filing date, on a 338(g) or 338(h)(10) deal

Form 8023 itself, proof of its filing date against the nine-month deadline, and, for a 338(h)(10) election, every S corporation shareholder's signed consent, or the selling consolidated group's.

The Section 382 computation, on a stock deal involving a loss target

The target's value immediately before the ownership change, the ownership shifts that drove it, and the resulting annual limitation, kept as a working paper rather than reconstructed on examination.

The Florida certificate of compliance

The DR-843, or the seller's DR-842, filed before closing on a deal transferring more than half the business, its assets, or its inventory. Each applies for a transferee liability audit; the certificate itself goes to the seller, not to the buyer who filed.

Where it goes wrong

Most of what goes wrong here traces back to one of two places: the seven-class allocation, or a deadline that cannot be moved.

What the Ninth Circuit did in Schulz

Schulz v. Commissioner shows what an aggressive covenant looks like once a court gets hold of it. The taxpayers structured part of a sale price as an $18,000 covenant not to compete, negotiated only in the deal's final stages, running one year, with no independent business rationale the buyers held at signing. The Ninth Circuit affirmed the Tax Court in recharacterizing the entire amount as a disguised sale of goodwill, applying the strong-proof rule from Ullman v. Commissioner against the taxpayers who had signed their own allocation.

A buyer's indifference between a covenant and goodwill does not license manufacturing a covenant with no economic reality behind it. Schulz shows a court will not respect the label the parties chose if the substance is not there.

The recurring mistakes

• Inconsistent Form 8594 or 8883 numbers between buyer and seller, which the regulation lets the IRS challenge regardless of what was filed.
• A covenant priced to a token amount with no economic support behind it, the mirror image of Schulz.
• Missing anti-churning exposure on a related-party or partner-buyout deal, a flat disallowance under Section 197(f)(9), not a valuation dispute open to negotiation on examination.
• Missing the Form 8023 deadline, which is serious but not always fatal. Rev. Proc. 2003-33 grants an automatic extension under Treasury Regulation 301.9100-3, running twelve months from the date the failure is discovered, and it is the exclusive route for getting one. Past that, the election is gone.
• Pricing a stock deal's loss carryforwards at face value instead of running the Section 382 computation first, the most common overpayment I see in a loss-company acquisition.
• Treating a Section 338(g) election on a domestic C corporation as a free step-up, when it can add a real, avoidable second layer of corporate tax that needs modeling before electing, not after.
• Skipping Florida's transferee-liability certificate on a deal transferring more than half the business, an exposure with nothing to do with federal income tax and easy to overlook on an otherwise simple asset purchase.

A situation where this comes up

The clearest version of this I see is a practice acquisition: one practitioner buying the operating assets of another who is retiring, structured as an asset purchase, the price spread across equipment expensed immediately and a pool of client list, covenant, and goodwill landing on the identical 180-month schedule.

Whether the retiring owner's goodwill is personal, built on that individual's relationships, or belongs to the practice as an entity, is a real question on the seller's side; it can change whose return reports the gain and under what character. It does not change the buyer's amortization: a buyer who pays cash for goodwill did not create it, so purchased goodwill amortizes over fifteen years under Section 197 regardless of whose relationships built it.

What usually varies deal to deal is how hard the seller pushes to shrink the covenant allocation, and I can typically accommodate that without costing my buyer client anything, provided whatever covenant remains is specific and restrictive enough to be real if it is ever tested.

The version that worries me is the one where a buyer skips the Florida closing checklist because the deal feels too small, or the parties have known each other for years. Successor liability for a seller's unpaid state tax does not care how well the parties know each other, and the certificate of compliance is the one document here that has nothing to do with the federal numbers and everything to do with making sure the buyer does not end up paying for the seller's past.