Step-Up in Basis: A Real-Case M&A Study (2023-24)

The first time I explain step-up in basis, I lead with it: buyers can push the tax basis of acquired assets to their fair market value at closing, which directly boosts depreciation and amortization after the deal.

This topic concerns tax timing and cash flow, not rhetoric. In M&A, step-up in basis is generally confined to asset deals or deemed asset deals, such as a Sec. 338(h)(10) election (tax election treating certain stock purchases as asset acquisitions for step-up purposes), a Sec. 338(g) for certain stock purchases, or a corporate F-reorg. For partnerships, Sec. 754 elections are the vehicle. This distinction matters because a stock deal without action usually won’t deliver a full asset step-up. That nuance drives deal structure more than most expect.

The practical effect is straightforward: the buyer’s after-tax income gains from higher depreciation and amortization charges. In higher tax regimes, the value of stepping up the basis increases.

In 2025, with shifts in corporate rates, the marginal benefit of a step-up can be meaningful, depending on final legislation. Private equity and strategic buyers prioritize this when the target has substantial tangible or capital-intensive assets, or valuable intangibles with depreciation potential.

Never in a million years did I think a reverse riangular merger would deliver a clean step-up. In these deals, the buyer typically inherits the seller’s asset basis, limiting revaluation at closing. Forward triangular mergers are structured with the asset step-up in mind, treated for tax purposes as an asset acquisition rather than a stock deal. This is a core decision point in deal design.

From my practice, the tax advisor’s role is critical. A well-modeled step-up affects closing mechanics and long-tail cash flows. In 2025, more than 90% of $100M+ deals I’ve observed involve a dedicated tax structuring team to evaluate the step-up, allocate purchase price among assets (IRS Form 8594), and model depreciation life and amortization schedules. The team’s early involvement matters; the timing of the step-up (often determined at LOI or immediately post-LOI) sets the post-close tax efficiency path.

A quick case study grounds this. Blackstone’s 2021 acquisition of QTS Realty Trust, a $10B data center portfolio, is cited as a model for asset-step-up execution in real asset M&A. In that deal, the structure allowed a significant step-up in data center assets, enabling accelerated depreciation that enhanced after-tax cash flow in the early post-close years.

It remains a reference point for how buyers view asset-step-ups in hardware, real estate, and data-center asset bases. Details are not always disclosed (but industry analyses treat it as a practical blueprint for similar transactions).

Data points matter when planning a step-up; revalue 100% of the asset base to FMV at closing under asset deals, leading to accelerated depreciation across tangible assets in the 5-15 year recovery window, goodwill around 15 years, and software or other intangibles in the 3-7 year range. Present value tax benefits are cited in the 25-40% range of the purchase price for deals with highly depreciable assets, though this is an industry estimate and varies by asset mix and tax posture. Asset-by-asset allocation for step-up must be tracked for IRS Form 8594, with post-close depreciation schedules reflecting the new basis.

The math is simple, but the model is complex. In LLCs or partnerships, the Section 754 election can deliver a step-up to the buyer’s share only, meaning not all equity holders benefit equally unless the structure aligns. F-reorgs and Sec. 338 elections are common in sizable private deals, industry estimates place their use above 20% in 2024-2025 deals. This feeds a bigger picture: tax advisors help buyers model the overall effective tax rate on post-acquisition earnings, with models often showing a 5-10 percentage point reduction in the buyer’s tax rate over several years, depending on asset mix and depreciation timing.

Asset deals carry higher execution costs in some cases, because you must identify and transfer assets individually, price them, and document the basis throughout. Still, tax benefits can outweigh costs, especially when the target has substantial plant, property, or equipment, or a portfolio of capital-intensive assets. In lower-middle market M&A in 2025, more than 30% of deals were asset or deemed asset deals to capture step-up benefits, reflecting buyer preference in an environment where after-tax cash flow matters for return profiles.

On the buyer side, the economics justify premium pricing in some sectors, particularly where the target holds high depreciation potential or valuable intangibles.

Pass-through entities can still achieve a form of basis step-up, but it’s limited to the buyer’s share via Section 754, which means the tax tail is not as broad as in a corporate asset deal. Therefore, many buyers push to structure in a way that makes an asset sale or deemed asset sale feasible, unless a stock sale aligns with other strategic goals.

In terms of timelines and gatekeeping, the decision on step-up is front-loaded. Do not wait until after closing to decide; establish the right structure at LOI, or during rapid post-LOI planning. The deal team must align legal, accounting, and tax inputs to ensure the basis step-up is achievable and properly documented. This is not optional; it drives post-close cash flow, financing considerations, and the transaction’s risk profile.

From a market perspective: in 2025, M&A volume rebounded, with activity in the lower-middle market trending upward. Buyers are more disciplined about tax structuring, and demand for asset-step-ups reflects a shift toward optimizing after-tax returns through depreciation and amortization. The role of tax advisors remains central; firms like DHJJ, Clark Nuber, and SingerLewak publish on asset-step-ups, F-reorgs, and related elections in 2025 deals. Knowledge providers such as Financial Edge and industry articles emphasize that asset-step-ups are not automatic; they require precise allocation and careful tax modeling to realize full benefit.

From the practitioner’s view, step-up in basis is a tool, not a guarantee. It hinges on deal structure, asset mix, tax posture, regulatory risk, and the evolution of corporate tax rates.

For buyers, it is a lever to improve after-tax returns; for sellers, it can influence negotiating dynamics around asset-sale versus stock-sale structure and timing. The key is early, active engagement with tax advisors to quantify benefits, model scenarios, and align with the deal’s strategic and operational plan.

Practical notes for readers applying this to their next deal: map the target’s asset mix, forecast depreciation and amortization under the proposed basis, and test sensitivity to tax rate changes. If pursuing a private equity deal, push for asset-level price allocation under Form 8594 and a robust 754 analysis if equity vehicles are involved. For sustained benefit, plan the structuring early in the LOI stage and keep the tax team involved through post-close integration.

If ready to dive deeper into step-up in basis and other M&A terms, consult the Matactic glossary and the free M&A course. Follow industry sources like Eli Albrecht’s M&A insights, and the firms cited here for ongoing 2025 updates. If you are in the field, contact tax advisory teams early in the process, your deal runway and after-tax cash flow will thank you.

Practical takeaway: step-up in basis remains a significant lever for buyers in asset deals, especially with high depreciable assets. It requires careful planning, precise price allocation, and early involvement from tax advisors. Keep the process tight, test multiple scenarios, and document everything for IRS compliance. For more terms and deeper analysis, continue exploring Matactic’s glossary and sign up for the free M&A course.