When diving into the world of small business acquisitions, a variety of tax considerations come into play. One such consideration is the Section 338(h)(10) election—a tax provision that can significantly influence the dynamics of an acquisition. For buyers and sellers keen on optimizing their tax benefits, understanding this provision is crucial.  In this article, we’ll explore the 338(h)(10) election in the context of a small business acquisition, specifically a $2,000,000 deal funded by the Small Business Administration (SBA).
What is the 338(h)(10) Election?
To break it down simply, the 338(h)(10) election allows a corporate buyer and seller to treat a stock sale as an asset sale for tax purposes. While the buyer technically purchases the target’s stock, for tax purposes, it’s treated as if the buyer purchased the company’s assets. This can lead to beneficial tax results for both parties.
A Real-World Scenario: A $2,000,000 Acquisition
Consider a scenario where Company A is acquiring Company B for $2,000,000. Company B has significant assets and has been in operation for several years. While Company A could go for a straightforward stock purchase, both parties decide that a 338(h)(10) election is the better route.
Why Opt for 338(h)(10) in this Scenario?
  • Buyer’s Perspective (Company A): By treating the purchase as an asset acquisition, Company A gets a step-up in the tax basis of the acquired assets to their fair market value. This higher basis allows for greater future depreciation and amortization deductions, leading to tax savings in the coming years.
  • Seller’s Perspective (Company B): Company B can benefit if it has low-basis assets that would generate significant capital gains in a traditional asset sale. The 338(h)(10) election might enable the seller to pay tax at more favorable dividend rates instead.
Funding the Acquisition: The Role of the SBA
Given the significant price tag of $2,000,000, how can Company A fund this acquisition? Enter the Small Business Administration (SBA).
The SBA offers loan programs designed to assist small businesses in acquiring other companies. With favorable interest rates, longer terms, and relatively low down payment requirements, SBA loans are a go-to for many small business acquirers.
For our example, Company A approaches the SBA for an acquisition loan. After navigating the application process and meeting the SBA’s criteria, Company A secures the necessary funds for the acquisition.
Key Takeaways for Small Business Acquisitions
  • Tax Implications Matter**: The 338(h)(10) election can provide valuable tax benefits. Both buyers and sellers should be familiar with its implications.
  • SBA Can Be a Vital Resource**: For small companies looking to expand through acquisitions, the SBA can provide crucial funding support.
  • Always Consult Experts**: Before making any decisions related to acquisitions or tax elections, always consult with financial and tax experts.
In the intricate realm of small business acquisitions, tools like the 338(h)(10) election can be game-changers. Paired with the financial backing of institutions like the SBA, small businesses have numerous avenues to drive growth and maximize profitability. Always stay informed and seek expert counsel to make the best acquisition decisions.
If you would like a no-cost initial consultation, please complete the appointment form adjacent to this article or email Scott Levine at [email protected].  Or, for more information about our Mergers & Acquisitions practice, click here.

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