Iowa House File 2085 – Iowa’s ESOP Initiative

Posted by Aaron Juckett, CPA, CPC, QPA, QKA on Tue, Jan 31, 2012
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Iowa's ESOP InitiativeTax break on businesses sold to employees takes step forward provides an update on the status of Iowa's Employee Stock Ownership Plan (ESOP) Initiative for encouraging interested Iowa business owners to .  The bill was approved by a subcommittee of the House's Ways and Means Committee and will now be considered by the full committee.  The article discusses the fiscal impact of the legislation: 

The Legislative Services Agency predicts the bill once passed could cost the state $1.7 million in the coming year. $1 million of that would come from additional state spending to assist companies in making the transition to an employee-ownership structure. The tax break for the owners selling their business — an exemption from individual income taxes on the capital gains earned on the sale — would cost the state the other $700,000 in 2013. That loss in tax revenue would rise to $900,000 by 2016, according to the fiscal projection.

Here is the text of Iowa House File 2085 – Iowa’s ESOP Initiative (formerly HSB 516):

HOUSE FILE       

                                 BY  COMMITTEE ON ECONOMIC

                                     GROWTH/REBUILD IOWA

 

                                 (SUCCESSOR TO HSB 516)

 

                                      A BILL FOR

 

  1 An Act relating to employee stock ownership plans by

  2    encouraging the adoption of such plans by Iowa corporations,

  3    creating an individual income tax exemption, making an

  4    appropriation, and including retroactive applicability

  5    provisions.

  6 BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA:

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PAG LIN

 

 

 

  1  1                           DIVISION I

  1  2                    ESOP FORMATION ASSISTANCE

  1  3    Section 1.  EMPLOYEE STOCK OWNERSHIP PLAN ASSISTANCE AND

  1  4 PROMOTION.

  1  5    1.  There is appropriated from the general fund of the state

  1  6 to the economic development authority for the fiscal year

  1  7 beginning July 1, 2012, and ending June 30, 2013, the following

  1  8 amount, or so much thereof as is necessary, to be used for the

  1  9 purposes designated:

  1 10    For providing financial assistance, including establishment

  1 11 of a loan program, and technical assistance, marketing, and

  1 12 education to businesses interested in establishing employee

  1 13 stock ownership plans and for procuring the services of an

  1 14 independent contractor with expertise in the formation of

  1 15 employee stock ownership plans:

  1 16 .................................................. $  1,000,000

  1 17    Notwithstanding section 8.33, moneys appropriated pursuant

  1 18 to this section shall not revert but shall remain available to

  1 19 the economic development authority for the purposes designated

  1 20 until expended. Notwithstanding section 12C.7, subsection 2,

  1 21 earnings or interest on moneys appropriated pursuant to this

  1 22 section shall be retained by the economic development authority

  1 23 and used for the purposes designated until expended.

  1 24                           DIVISION II

  1 25         CAPITAL GAIN DEDUCTION FOR SALE TO AN IOWA ESOP

  1 26    Sec. 2.  Section 422.7, subsection 21, Code Supplement 2011,

  1 27 is amended by adding the following new paragraph:

  1 28    NEW PARAGRAPH.  e.  (1)  To the extent not already excluded,

  1 29 the net capital gain from the sale or exchange of employer

  1 30 securities of an Iowa corporation to a qualified Iowa employee

  1 31 stock ownership plan when, upon completion of the transaction,

  1 32 the qualified Iowa employee stock ownership plan owns at least

  1 33 thirty percent of all outstanding employer securities issued

  1 34 by the Iowa corporation.

  1 35    (2)  For purposes of this paragraph:

  2  1    (a)  "Employer securities" means the same as defined in

  2  2 section 409(l) of the Internal Revenue Code.

  2  3    (b)  "Iowa corporation" means a corporation whose commercial

  2  4 domicile, as defined in section 422.32, is in this state.

  2  5    (c)  "Qualified Iowa employee stock ownership plan" means an

  2  6 employee stock ownership plan, as defined in section 4975(e)(7)

  2  7 of the Internal Revenue Code, and trust that are established

  2  8 by an Iowa corporation for the benefit of the employees of the

  2  9 corporation.

  2 10    Sec. 3.  RETROACTIVE APPLICABILITY.  This division of this

  2 11 Act applies retroactively to January 1, 2012, for tax years

  2 12 beginning on or after that date.

  2 13                           EXPLANATION

  2 14    This bill relates to employee stock ownership plans.

  2 15    Division I of the bill provides for an appropriation of $1

  2 16 million to the economic development authority for the purpose

  2 17 of providing financial assistance, including the establishment

  2 18 of a loan program, and technical assistance, marketing, and

  2 19 education to businesses regarding the formation of employee

  2 20 stock ownership plans.

  2 21    Division II of the bill provides for an exemption from the

  2 22 computation of the state individual income tax of the net

  2 23 capital gain from the sale or exchange of employer securities

  2 24 of an Iowa corporation to a qualified Iowa employee stock

  2 25 ownership plan if, upon completion of the sale or exchange,

  2 26 the qualified Iowa employee stock ownership plan owns at least

  2 27 30 percent of all outstanding employer securities issued

  2 28 by the Iowa corporation.   For purposes of the exemption,

  2 29 "employer securities" means the same as defined in section

  2 30 409(l) of the Internal Revenue Code, "Iowa corporation"

  2 31 means a corporation whose commercial domicile is in Iowa,

  2 32 and "qualified Iowa employee stock ownership plan" means an

  2 33 employee stock ownership plan and trust that is established by

  2 34 an Iowa corporation for the benefit of the employees of the

  2 35 corporation.

  3  1 Division II of the bill applies retroactively to January 1,

  3  2 2012, for tax years beginning on or after that date.

 

Topics: legislation, employee stock ownership plan

Aaron Juckett, CPA, CPC, QPA, QKA
Written by Aaron Juckett, CPA, CPC, QPA, QKA

Aaron is President and Founder of ESOP Partners and provides implementation, administration, and consulting services to hundreds of companies. He is a member of The ESOP Association (TEA) and the National Center for Employee Ownership (NCEO).

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