Selling to an ESOP Enables a Business Owner to Defer/Avoid Taxation
Long-term capital gains rates are curren
tly scheduled to increase from 15% to 20% on January 1, 2013. In addition, capital gain income will also be subject to an additional 3.8% Medicare tax. This 59% increase will make an IRC Section 1042 Tax Deferred Sale of Stock to an ESOP more attractive.
In a Section 1042 sale, if the business owner:
(1) makes the appropriate election,
(2) sells enough C Corporation company stock so the ESOP owns at least 30% of the company after the transaction, and
(3) invests (a.k.a. rollover) the sale proceeds in qualified replacement property (a.k.a. QRP, generally stocks or bonds of domestic operating companies, though floating rate notes (FRN) can provide additional investment flexibility) within the replacement period (3 months prior to 12 months after),
then any gains are deferred until the QRP is liquidated (and then taxed at long-term capital gains rates).
If the seller still holds the QRP at death, then the QRP will receive a step-up in basis and taxation will be avoided altogether.
Deferring or avoiding taxes will ultimately increase the after-tax sale proceeds. This is a powerful business transition and succession planning strategy that will become more valuable as capital gains increase.
Please stay tuned as we continue to examine the many reasons to sell to an ESOP:
