Buying a Small Business with a Stock Purchase? Here’s Why the Section 336(e) Election Might Be Your New Best Friend
AlphaY Team
Content Team
Buying a Small Business with a Stock Purchase? Here’s Why the Section 336(e) Election Might Be Your New Best Friend
If you’ve been around the block in business acquisitions, you know that how a deal is structured can make a big difference in the tax bill. But here’s the curveball—sometimes you can make a deal look like one thing legally, but treat it like something else for taxes.
Enter the Section 336(e) election—a little-known IRS provision that can turn a stock sale into an asset sale for tax purposes. And if you’re buying a small or mid-market S corporation, that can be a big win.
What’s the Big Idea Behind 336(e)?
Normally, when you buy stock, you step into the seller’s shoes—you get the company “as is,” warts, tax basis, and all. No step-up in asset values, no fresh depreciation schedule.
But with 336(e), you and the seller agree to pretend the company sold all of its assets for fair market value right before the sale, then liquidated. That means:
- The assets get a fresh stepped-up basis (aka they’re “reset” to what you paid for them).
- You get better depreciation/amortization deductions going forward.
- You’re not stuck with decades-old asset values from the seller’s books.
And unlike its cousin, the 338(h)(10) election, you don’t have to be a corporation to make it work—LLCs, partnerships, and even individuals can join the party. Multiple buyers? No problem.
When You Can Use It (and When You Can’t)
For the IRS to bless a 336(e) election, you need a Qualified Stock Disposition (QSD):
- Sellers must dispose of at least 80% of the company’s stock (by vote and value) within 12 months.
- Selling to related parties doesn’t count—sorry, no family shuffles.
- If it’s an S corp, every shareholder (even the ones not selling) has to sign on.
Miss any of these? No election for you.
How the Election Happens
- Written agreement between seller(s) and the S corporation (and all shareholders if it’s an S corp).
- Deadline: By the tax return due date (including extensions) for the year of the sale.
- Attach the 336(e) election statement to that return, along with Form 8883 for the asset allocation.
- Pro tip: Timing is tight—miss the window and your only hope is an IRS letter ruling, which isn’t cheap.
The Tax Ripple Effect
Here’s the catch—since the “old” company is treated as selling its assets, it recognizes gain or loss. That means:
- Sellers may owe tax at ordinary income rates for certain assets (think depreciation recapture).
- Buyers get the fresh basis and better deductions.
- It’s a single level of tax, not the double tax you see in C corp asset sales.
When It’s a Smart Move
Use 336(e) if:
- You want that basis step-up without the mess of an asset purchase agreement.
- You’ve got multiple buyers or non-corporate buyers.
- You plan to convert the business to an LLC or partnership after the deal.
Be careful if:
- You’re on a tight closing schedule and haven’t lined up all shareholder signatures.
- The seller’s tax hit makes them push for a higher price to compensate.
Quick Recap
| Element | Details |
|---|---|
| Election Type | Stock sale → asset sale for tax |
| Qualified Disposition | ≥80% stock sold within 12 months |
| Who Can Buy | Anyone—individuals, partnerships, corps |
| Requirement | Written agreement + election statement on time |
| Benefit | Basis step-up, better deductions |
| Risks | Timing deadlines, unanimous S corp shareholder agreement |
Bottom line: Section 336(e) is one of those niche tools in the dealmaker’s kit. Use it right, and it can unlock big tax value in a stock deal—especially for S corps. Just don’t wait until the week before closing to bring it up.
And if you’re juggling deal flow, valuation models, and keeping track of every moving piece in your acquisition pipeline, AlphaY.io was built for this—your all-in-one workspace for buying a business without losing your mind (or your Post-its).