What are ESOP Tax Benefits
For some businesses, taxes are significantly less
For business owners, liquidity and legacy are often listed as the top two advantages of having an employee stock ownership plan (ESOP) – and rightfully so. However, there are substantial tax benefits to having an ESOP too.
With an ESOP, your clients may be able to liquidate their business in a tax-deferred manner and potentially eliminate or reduce corporate taxes. An ESOP allows employees to own part of the business, but because the benefit is inside of a qualified retirement plan, they won’t pay taxes on the earnings and growth of their ESOP account balance until they receive a distribution.
What are ESOP tax benefits?
If the company is structured as a C Corporation, the selling owner can defer capital gains on the sale if the proceeds are reinvested in a qualified replacement. The loan repayments are deductible to the business as an ordinary business expense.If the company is an S Corporation, loan payments are deductible as a business expense and tax liability on the remaining company’s earnings is reduced. There are some more complex strategies that can give your client the best of both corporate structures. It can be a bit specific, so you may want to work with an ESOP consultant or tax-advisor to model some of the options for your client.
Reduced tax liability
Tax savings
Remember, if a business decides to set up an ESOP, the company first forms a trust and establishes the retirement plan. Next the company gets financing and lends the proceeds to the ESOP trust to buy out all or some of the owner’s shares. In essence, the owner has “sold” their company to the ESOP. This sale can offer substantial tax savings, as shown by the ABC company at right.
Next steps
E-mail our Advisor Support Team or call 800-952-3343, option 2.