The Senate Finance Committee today released a summary of the Enhancing American Retirement Now (EARN)
Act that includes a provision partially expanding section 1042 tax deferral to ESOPs that are S-corporations. Expanding section 1042 tax treatment to S-corporations has been a top priority of The ESOP Association’s advocacy efforts for many years and has been a focus of recent advocacy days and grassroots advocacy campaigns, including at TEA’s National Conference for the last 2 years. Section 1042 of the Internal Revenue Code allows eligible shareholders to defer capital gains taxes on eligible stock sold to an ESOP if the proceeds of the sale are reinvested in qualified replacement property. This tax treatment is an important incentive for ESOP formation but is currently not available to S-corporations.
The EARN Act section 1042 provision matches a similar House provision in the Securing a Strong Retirement Act (H.R. 2954) which passed the House in March with overwhelming bipartisan support. It would allow up to 10% of capital gains to be deferred but will not take effect until Jan. 1, 2028, The Senate Finance Committee is expected to have a markup on this bill next Wednesday.
This bill is expected to be combined with the Rise and Shine Act, passed earlier this week by the Senate Health, Education, Labor and Pension Committee.