A basis step-up is an increase in the tax basis of acquired assets to their fair market value (the purchase price), allowing the buyer to depreciate and amortize the higher basis going forward. It is one of the most valuable tax benefits a buyer can obtain, because it converts purchase price into a stream of future tax deductions — and securing or forgoing it drives much of M&A deal structuring.
Why a step-up is valuable
When a buyer steps up basis, the assets are treated for tax as if newly purchased at today's value, so the buyer can take fresh depreciation and amortization deductions on that higher basis. Crucially, under IRC §197, acquired intangibles and goodwill become amortizable over 15 years for tax — turning even goodwill into a deduction. These deductions shield future income from tax, and the present value of that tax shield can be worth a meaningful percentage of the purchase price. Buyers will often pay more for a deal that delivers a step-up.
When a step-up is available
A step-up is not automatic — it depends on the structure:
- Asset purchase. A step-up is inherent: the buyer literally buys assets and takes a cost basis in them.
- §338(h)(10) (or §338(g)/§336(e)) election. A stock deal treated as an asset deal for tax — delivering a step-up from an eligible S-corp or subsidiary target.
- F-reorganization + LLC purchase. The common S-corp structure that produces asset-sale (step-up) treatment while preserving rollover flexibility.
A step-up is not available in a plain tax-free reorganization or an ordinary stock purchase without a §338 election — there the buyer takes a carryover basis.
The buyer–seller tension
The step-up is the heart of the asset-vs-stock negotiation. The buyer wants it; the seller often bears higher tax when a deal is structured to deliver it (ordinary-income recapture, double tax for a C-corp). The parties resolve this by treating the structure as a price term — the buyer compensates the seller (a "gross-up") so the after-tax outcome is acceptable to both. A step-up is worth pursuing only when its value to the buyer exceeds the extra tax cost to the seller.
Why it matters
Because a step-up turns purchase price into deductible basis — including 15-year amortization of goodwill and intangibles — quantifying its value (and the gross-up needed to obtain it) is a standard part of deal modeling and a frequent driver of how a transaction is structured. It is the single biggest reason buyers favor asset treatment and a central topic of tax structuring.
See also
- Asset purchase — A deal structure in which the buyer acquires specific assets (and assumes specific liabilities) of the target, rather than buying its equity. Generally favoured by buyers for liability and tax reasons.
- Section 338(h)(10) election — A joint U.S. tax election that treats the stock acquisition of a domestic corporation (typically an S-corp or subsidiary) as a deemed asset purchase for tax purposes, giving the buyer a basis step-up.
- F-reorganization — A tax-free 'mere change in form' reorganization under Section 368(a)(1)(F), commonly used to restructure an S-corporation prior to a sale to enable a stock deal that gets asset-deal tax treatment.
- Purchase price allocation — The process of assigning an acquisition’s price to the assets and liabilities acquired.
- Goodwill — The intangible asset recorded when a buyer pays more than the fair value of net assets.
- Taxable vs tax-free reorganization — The threshold tax-structure question in U.S. M&A: whether the seller recognises gain at closing (taxable) or whether the transaction qualifies for non-recognition under the reorganization rules of Section 368.