Allocation of purchase price in a stock sale: when it happens and when it doesn't

Published October 25, 2026 · Rules checked against SBA and IRS sources as of October 2026

"We're doing a stock deal, so we don't need an allocation" is right more often than it's wrong. It's wrong in three common situations: when the parties make an election that treats the stock purchase as an asset purchase, when the "stock" is really an interest in an LLC or partnership, and when the buyer keeps GAAP books. This page sorts those out. If you're still deciding between structures, our sister site covers asset purchase vs stock purchase from the buyer's side. Nothing here is tax advice.

A plain stock purchase: no asset allocation for tax

When you buy the shares of a corporation, you own shares. Your tax basis is in the stock, equal to what you paid. The corporation itself didn't sell anything, so its basis in its equipment, inventory and intangibles carries on unchanged, including any assets the seller depreciated to zero years ago. No Section 1060 allocation, no Form 8594 for the share purchase.

That has a cost for the buyer. A premium over the company's asset basis, which is often most of the price in a small business, generates no depreciation or amortization. It sits in the share basis until you sell the shares. That's the main reason buyers of small businesses prefer asset purchases, and why sellers who are C corporations, facing two layers of tax on an asset sale, prefer to sell stock.

When an election creates an allocation

Section 338(h)(10)

A 338(h)(10) election lets a stock purchase be taxed as if the target sold its assets and then liquidated. The conditions come from Section 338 and Treasury regulation 1.338(h)(10)-1:

• The buyer must be a corporation making a qualified stock purchase: acquiring by purchase stock meeting the 80% vote and value test of Section 1504(a)(2) within a 12-month acquisition period.
• The target must be an S corporation, or a member of a selling consolidated group or a selling affiliate.
• The buyer and the sellers (the S corporation shareholders, or the selling group) make the election jointly on Form 8023. S corporation shareholders who don't sell must also consent.
• The election is due by the 15th day of the 9th month beginning after the month in which the acquisition date occurs.

Once made, the target is treated as selling all its assets in a single transaction at the close of the acquisition date. The deemed sale price and the buyer's new basis are allocated among the assets using the same residual method and seven classes in regulation 1.338-6. The allocation is reported on Form 8883, the asset allocation statement under Section 338; the IRS instructions say you file Form 8883 to supply the information relevant to the election, alongside Form 8023.

Section 336(e)

A 336(e) election produces a similar deemed asset sale but doesn't require a corporate buyer. It applies to a "qualified stock disposition": a sale, exchange or distribution of stock meeting the 80% test by a domestic corporation or by S corporation shareholders within a 12-month disposition period. Under regulation 1.336-2, the seller and target enter into a written, binding agreement to make the election and attach an election statement to their returns. A deal that already qualifies as a qualified stock purchase is generally handled under 338 instead.

Section 338(g)

A corporate buyer can also make a unilateral 338(g) election. The deemed asset sale tax falls on the target, which the buyer now owns, so it's mostly used in specific cross-border situations rather than small domestic deals.

When the "stock" isn't stock

Many small businesses are LLCs. What matters for tax is how the entity is classified, not what it's called:

• Single-member LLC disregarded for tax. Buying all its membership interests is generally treated for tax as buying its assets, so the asset allocation rules apply.
• Multi-member LLC taxed as a partnership. The Form 8594 instructions say a transfer of a partnership interest generally doesn't require Form 8594, but a purchase of a partnership interest that is treated as a purchase of partnership assets constituting a business is subject to Section 1060, and the buyer must file. Buying every interest from every member is the common case. Where a partnership has a Section 754 election in effect, a purchase of a partial interest can lead to a basis adjustment for the buyer's share under Section 743(b), with its own allocation rules.
• Restructuring before a sale. S corporation sellers sometimes reorganize before closing so the buyer purchases interests in an LLC that is treated as owning the assets. The steps and timing matter, and this is squarely work for tax counsel on both sides.

The book side doesn't care about the tax structure

If the buyer prepares GAAP financial statements, ASC 805 requires a fair value allocation for a business combination whether the deal was stock or assets. In a stock deal without an election, that produces a gap between book basis (stepped up to fair value) and tax basis (carried over), which shows up as deferred taxes. Private companies have elections that simplify the intangibles; see ASC 805 purchase price allocation.

Comparing the three outcomes

The last two rows explain why elections exist: they give the buyer an asset-style tax basis while keeping the company, its contracts and its licences intact. The price is that the sellers are taxed as if the company sold its assets, so sellers often ask for a gross-up. That's a negotiation for advisers with the actual numbers.

Stock purchases and SBA loans

SBA 7(a) change-of-ownership financing isn't limited to asset deals. Under Appendix 15 of SOP 50 10 8.1, the scope of work for the business valuation must state whether it's an asset or stock purchase and what is included, including any debt the buyer assumes. In a stock purchase the buyer takes on the company's liabilities, known and unknown, which is one reason lenders and buyers look harder at stock deals. Ownership changes within an existing company, such as a partner buyout, follow their own transaction-type rules under the SOP.

For the asset-deal rules, start with the purchase price allocation guide and Section 1060; for how each class is taxed to buyer and seller, see purchase price allocation tax considerations. Code sections and regulations checked on Cornell LII and IRS.gov as of October 2026.

Common questions

Related guides

• Purchase price allocation: how to split a business price across assets
• Section 1060 purchase price allocation: what the statute and regulations require
• ASC 805 purchase price allocation: the book side of a business purchase
• Purchase price allocation tax considerations for buyers and sellers
• How lenders underwrite an SBA loan to buy a business

This guide explains rules and practice in plain English. It isn't legal, tax or credit advice, and SBA and IRS rules change. Check the current SOP, regulations and your lender's requirements before you rely on anything here. Examples with made-up businesses are illustrations, not real deals.