ESOP Capital Gains Deduction in Iowa

The governor of Iowa, Terry Branstad, recently signed into law a bill to encourage the creation of ESOPs. The effect of the provision is to create a 50% reduction of Iowa 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 provision apparently requires sellers to choose between the Iowa tax break and the Section 1042 federal tax incentive, which have significant differences. First, the Iowa legislation does not require the seller to buy qualified reinvestment property (QRP) with the proceeds of the sale. Secondly, the Iowa legislation does not distinguish between C and S corporations, while Section 1042 only applies to C corporations.