Technical Requirements to Qualify for 1042
A Section 1042 election allows the selling shareholder to defer capital gains tax by “rolling over” the proceeds from the sale of stock into Qualified Replacement Property (QRP). This rollover must take place within 12 months after the sale.
Think of the 1042 election as similar to a 1031 exchange in real estate, where the seller can defer taxes by reinvesting in a like-kind property. For 1042, the shareholder sells their stock in the company to an ESOP and reinvests the proceeds into QRP.
For more detail on QRP and how tax deferral works in an ESOP transaction, click here.
Key Requirements for a Section 1042 Election
To qualify for a Section 1042 election, certain criteria must be met.
- 30% Ownership: The ESOP must own at least 30% of the company after the transaction.
- Holding Period: Minimum 3-year ownership period for stock sold to the ESOP
- Corporate Structure: The company must be a C corporation at the time of the sale. Lazear’s tax strategists are experts in leading our clients who are not presently C corporations through a C corporation conversion to enable a 1042 election.
For business owners considering an ESOP, understanding the potential tax savings from a Section 1042 election is a critical step in planning for a successful transaction.
Learn why Section 1042 was created and how business owners can defer capital gains taxes.
Explore Lazear’s proprietary 1042 tax solution by clicking here.
