An employee stock ownership plan (ESOP) is a flexible exit planning strategy for business owners where the seller receives fair market value and favorable tax treatment on sale, the company receives tax-advantaged financing and enhanced cash flow, and the employees receive valuable retirement benefits and continued employment in a rewarding and motivational environment.
What are the tax benefits of an ESOP?
- Capital gain on the sale of shares of a C corporation to an ESOP may be deferred by the selling owner as long as, among other requirements, the ESOP owns 30% or more of the corporation’s shares after the transaction and the selling owner invests the sale proceeds in qualified replacement property.
- The percentage of profits of an S corporation owned by an ESOP are not subject to federal (and possibly state) income tax, because ESOPs are income tax exempt.
- Contributions by the company to the ESOP (including contributions used by the ESOP to pay principal and interest on a loan) are considered contributions to a tax qualified employee benefit plan and are tax deductible within certain limits.
- Dividends paid on stock held by the ESOP are tax deductible to a C corporation (but not an S corporation) if they are distributed to ESOP participants or are used to pay principal and interest on a loan.
- There are estate as well as charitable gifting planning opportunities for the selling owner.
- Employees receive tax-deferred retirement benefits, eligible for tax-free rollover upon distribution from the ESOP.
Have Additional Questions About the Tax Advantages of an ESOP for Your Company?
Fill out the form to connect with one of our ESOP Advisors to answer your questions regarding ESOP tax treatment, the taxation and sale of ESOP shares, ESOP taxation for employees and more.
BDO’s ESOP Advisors have a wide range of experience in investment banking, tax, valuation, employee benefits consulting, ESOP administration, and commercial banking, including representatives in our wholly-owned investment bank, BDO Capital Advisors, LLC.
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