TaxFinance
Step-Up in Basis
Also known as: Basis step-up, stepped-up tax basis, asset revaluation
The buyer's reset of acquired assets to fair-market value, creating depreciation and amortization deductions that lower the buyer's taxable income after closing. The step-up follows the price the buyer actually bears — deferred amounts add basis only as they become fixed or paid.
WHY IT MATTERS
When a deal is taxed as an asset purchase, the buyer resets the assets' basis to what they paid, turning the step-up into years of depreciation and amortization deductions. Founders sometimes hear the buyer gets the full step-up on day one — on the whole price, including deferred consideration — and keeps it even if the deferred amounts are never paid. That isn't how it works. A fixed seller note is generally in basis from closing, but if it's later forgiven or defaults, the benefit largely reverses through debt-forgiveness income or a basis reduction; a contingent earnout gives the buyer no basis at all until it's fixed or paid. So the step-up tracks the price the buyer actually bears — there's no durable free deduction on money that never changes hands. Where the step-up does bite the seller is character: in a deemed asset sale, the price allocation can push more of the seller's gain into ordinary income.