Acquiring an Existing Corporation: What Carries Forward, What Gets Limited

When you buy and keep the seller's corporation intact, tax attributes like NOLs and credits transfer to you—but Section 382 limitations restrict how much you can use each year. You also lose the stepped-up basis benefit that makes asset purchases tax-favorable for buyers.

Existing tax attributes carry forward. The corporation retains its net operating loss (NOL) carryforwards, tax credit carryforwards, and built-in gains history. However, Section 382 limits how much of the pre-acquisition NOLs you can use each year after an ownership change. If 50%+ of the stock changes hands within a three-year period, the annual NOL usage is capped at the stock value multiplied by the long-term tax-exempt rate.

No step-up in asset basis. Unlike an asset purchase, the corporation's assets keep their existing (often partially depreciated) basis. You do not get to reset depreciation schedules. This is the primary tax disadvantage of a stock purchase for buyers.

Built-in gains tax may apply to S-corps. If the corporation was a C-corp that elected S-corp status, the built-in gains tax under Section 1374 may apply to appreciated assets sold within five years of the S-election. This hidden tax exposure requires review during due diligence.

The tradeoff: Stock purchases preserve the entity's history (contracts, licenses, permits), but you lose the stepped-up basis benefit. A Section 338(h)(10) election can convert the tax treatment to an asset sale, but both parties must agree.