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C-Corp. forming ESOP then electing S-Corp. 1042 Question


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A C-corp. is thinking about becoming an ESOP. The selling owner wants to take advantage of the 1042 election.

The company would then want to elect becoming an S-Corp. Would electing to do so retroactively within the 2.5 month period after the beginning of the fiscal year jeopardize the 1042 election?

Or do you just make sure the sale occurs, say, on the last day of the year when it's definitely a C-corp?

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When electing "S" Corp status, the 2 1/2 month retro election would not be made.

A short tax year filing for the C corp would be made and perhaps a short tax year filing for the "S" corp would be made depending upon the timing of the election.

The timing of the transaction can certainly coincide with the fiscal year year of the C corporation.

And of course, hopefully someone has reviewed the timing of the transaction as it may relate to the accounting issues of LIFO versus FIFO (if applicable), inventory accounting, etc.

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Thanks, ASITD.

I suppose I should have said that we're approaching the fiscal year end for the company and someone is dead set on doing it this way. (He might be just using it to impose some sort of deadline to get the transaction going.)

But, I agree with you, the short year approach makes more sense.

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