What is a tax-free ESOP rollover? - ESOP Taxation
  • 888.SES.ESOP

What is a tax-free ESOP rollover?

Home » ESOP Knowledge Center » ESOP Tax Rules » What is a tax-free ESOP rollover?

A tax benefit of selling to an ESOP: Shareholders who sell their stock to an ESOP can elect to defer federal income taxes on the gain from the sale, if the sale qualifies as a tax-free rollover under Section 1042 of the Code.

In order to qualify for the rollover:

  • The ESOP must own at least 30 percent of the companys stock
  • The proceeds must be reinvested in Qualified Replacement Property
  • The stock sold to the ESOP must be common stock with the greatest voting power and dividend rights
  • The stock sold to the ESOP must have been acquired as an investment and not in an employment-related transfer
  • The seller must have owned the stock being sold for at least three years
  • The company is not an S corporation

Other things to note about the tax-free ESOP rollover:

  • The selling shareholder, any 25% or greater shareholder, and certain family members, are generally prohibited from receiving allocations of stock acquired through a tax-free ESOP rollover.
  • A shareholder may elect to roll over all or any portion of the ESOP sale proceeds. The election must be filed with the selling shareholders federal income tax return.
  • The company must agree to pay a penalty tax if the ESOP shares acquired through the rollover are sold or disposed of by the ESOP within three years after the date of sale.

Ready to Move Forward?

If you would like to learn more about how SES Advisors can guide you through the complexity
of exploring and installing an ESOP, please contact us.
Contact Us
Is an ESOP right for you?
×