With so many complex issues to consider, a section 338(h)(10) election can be a complex transaction that may not be appropriate for all S corporation sellers or buyers. A section 338(h)(10) election will adjust the tax basis of the S corporation’s assets in the hands of the buyer to fair market value.
As an alternative in this type of transaction, the portion of an S corporation’s asset value that can be attributed to the “personal goodwill” of the company’s owners or executives is allocated and segregated from the total asset value. The proceeds of that goodwill are reported as a gain to the shareholder to whom the goodwill relates and are treated as long-term capital gains. For S corporations with built-in gains, shifting purchase price to a shareholder’s personal goodwill may limit the double taxation that results from the built-in gains tax. The buyer benefits because it can deduct the purchase price associated with personal goodwill over 15 years
The sale may completed pursuant to installment sale rules, which involves disposition of property at a gain, where at least one payment is to be received after the tax year in which the sale occurs. This option offers the advantage to the seller of receiving payments over time and only including in income each year the part of the gain received that year.
For more information, please refer to IRS Publication 544 - "Sales and Other Dispositions of Assets" at the following link: https://www.irs.gov/publications/p544
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