September 7, 2023

Missouri Makes 50% Capital Gains Exclusion on ESOP Sales Permanent

NCEO founder and senior staff member

On September 6, Missouri Governor Mike Parsons signed S.B. 20 (also see the PDF of the bill text), one of whose provisions makes permanent a law enacted in 2016 that provides a 50% reduction in state capital gains taxes for business owners selling to an ESOP as long as the ESOP owns at least 30% of the company after the sale. The law was originally set to sunset in 2023, but this new law removes the sunset provision, making it permanent. Iowa passed a very similar law in 2012

In C corporations, the provision effectively requires sellers to choose between the Missouri tax break and the Section 1042 federal tax incentive, which allows sellers to take a tax deferral on sales to an ESOP in a C corporation if the ESOP ends up with 30% or more of the stock and the proceeds are reinvested in qualifying stocks and bonds of U.S. operating companies. Like almost all states, Missouri tracks federal law on this matter, so if the seller takes the federal Section 1042 deferral, there is no state income to declare in the first place on the income from the ESOP sale. That means there will be little or nothing to apply a 50% reduction in capital gains against unless the seller has substantial capital gains from other sources.

In S corporations, however, the 1042 deferral is not currently available, so selling owners in this context will be able to apply the 50% state exclusion to income from the ESOP sale (and it will still be useful in 2028 when S corporation sellers become eligible for a partial 1042 exclusion because that exclusion will cover only 10% of the sale proceeds).