To qualify for nonrecognition of capital gain when creating an ESOP, the ESOP must own a certain percentage of the company, sellers must reinvest proceeds into eligible securities, and the corporation must be a domestic corporation. Detailed tax advice should be sought to ensure compliance with IRS rules.
The owners of a closely held corporation may qualify for nonrecognition of capital gain when creating an Employee Stock Ownership Plan (ESOP).
For this nonrecognition of gain to apply, several requirements must be met:
The ESOP must own at least 30% of the company's stock after the sale.
Sellers must reinvest the proceeds into securities of U.S. operating corporations within a specified period, which is generally 12 months.
The corporation must be a domestic C corporation or have elected subchapter S status at the time of the sale.
These requirements are designed to ensure that the creation of the ESOP truly results in cooperative ownership of the business by the employees and is not simply a mechanism for owners to avoid taxes on capital gains.
It is important to note that specific tax advice should be sought from a qualified professional to ensure all IRS rules and requirements are met for nonrecognition of gain.