Depreciation and Amortization in Stock Purchase, without 338(h)10 Election

July 27, 2023

by a searcher from University of Cincinnati - Carl H. Lindner College of Business in Bear, DE, USA

Hi All,

I was under the impression that in an asset purchase, you can depreciate the tangible assets over their useful life and amortize the goodwill over 15 years. On the other hand in a stock purchase, you are basically purchasing a stock that has a indefinite life and hence, you can't amortize it. However, you can offset it when you exit and the company can still depreciate the tangible assets using the pre-acquisition depreciation schedule. In other words, you can't amortize the goodwill and can only take the deduction against it when you sell the company.

But I read a comment on this forum stating that you can write off goodwill in a stock purchase. So, I am a little confused. Could somebody clarify that how tangible asset depreciation and goodwill amortization work in a stock purchase (without using any workarounds such as 338(h)(10))?

Reply by a searcher
from Southwestern University in Houston, TX, USA

Here's the way I understand it from the CPAs that I've spoken with (entirely possible there is misunderstanding here):

In an asset sale, when you're purchasing the company name, etc., the value of those intangibles is categorized as "goodwill" and, like any other asset, it can be depreciated.

When doing a share sale / company purchase, there is no "goodwill". The whole thing is valued together and you're buying a percentage of the whole. Technically, the assets weren't sold - the same entity owns them before and after the share sale. That entity continues to depreciate its assets on the schedule it is already on.

There are much more complex rules if you're only purchasing part of the company and therefore have a basis for value (and taxation) that is transferred to the purchaser vs. acquiring into a newly formed SPV of 0 pre-existing value.

In the end, having a very specific discussion with a CPA will give you a much clearer answer on your specific deal.

Reply by a searcher
from University of Pennsylvania in Seattle, WA, USA

General answer, consult your qualified CPA. My understanding is that all assets will come over at their current tax basis so you have no step up in basis and inside basis of assets is unchanged. If there is remaining tax basis on the assets (probably not much given TCJA acceleration), you can continue to depreciate those. Note that if you are looking at c-corp books, the book basis may not equal the tax basis because depreciation schedules can be different. The goodwill generated in a stock purchase does not generate a tax benefit until later sale.

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