When you’re looking to buy a specialized business, it can take a lot of time to get your own licensing, patents, contracts, and customers. Time is money – can you afford to wait?
Luckily, there is a way to do a stock sale but treat it like an asset sale – so you can take on the existing licenses, patents, contracts, and customer list immediately. It’s called the Section 338 election. This can be a good deal, but not many people know about it.
At CSI Accounting & Payroll, we’ve worked with small business finances for over 50 years. That means we’ve advised many prospective business owners on methods to buy a business, answering questions like:
- What does “stock sale treated as an asset sale” mean?
- What is the difference between Section 338(h)(10) and Section 338(g)?
- Is the Section 338 election a good option for small businesses?
Treating a Stock Sale as an Asset Sale
As the opening paragraph describes, the Section 338 election is a provision from the IRS that lets you do a stock sale but treat it as an asset sale – provided the buyer and the seller both agree to it.
Let’s use an example.
You have your eyes on a business that has government contracts, and you want to be able to keep those contracts. The seller agrees to sell you the business as-is, with its contracts, name, and other assets (EIN, licenses, etc.), but treat it like an asset sale. That way, you can amortize the assets, but the buyer loses the capital gains benefit that they would have gotten if it was treated like an asset sale.
The Difference Between Section 338(h)(10) & 338(g) Elections
There are two versions of the Section 338 election that people ask us about: Section 338(h)(10) and Section 338(g).
Section 338(h)(10)
This is the more popular option between the two. In fact, it’s essentially as simple as what we described in the previous section.
This means it’s a great option for small businesses. It just can’t be used for businesses that don’t have stock, so you must be an S-Corporation or a C-Corporation.
Section 338(g)
This option is very rare and not applicable to small businesses. It’s often done by very large businesses that buy the stock and patents of small businesses that aren’t doing too well.
This also creates double taxation (two levels of taxation): one against shareholders when they sell their stock, and the other by the corporation when it sells its assets.
Section 338 vs. Other Small Business Sale Options
Is the Section 338 election good for small businesses? Yes, but it depends on a few variables:
- You have stock as an S-Corp or C-Corp.
- You want to keep the company intact instead of just purchasing the assets.
- You’re buying a specialized business with licenses, contracts, patents, or other unique assets.
If these don’t apply to you, then the Section 338 election isn’t right for you! However, a monthly accountant can advise you on other ways to buy or sell a business – and help throughout the process.
Buy or Sell a Business With Confidence!
Now that you know what treating a stock sale like an asset sale means, the difference between Section 338(h)(10) and Section 338(g), and whether they’re good options for small businesses (or if a monthly accountant can help you choose a better option), are you ready to check out monthly accounting services?
If so, please consider CSI Accounting & Payroll! To see if we can be a good fit for your business, click the button below for a free consultation:
Not ready to talk? That’s okay! First, learn more about the different types of advice that a monthly accountant can offer by clicking the image below:
