Among the many advantages of an Employee Stock Ownership Plan (ESOP), perhaps the most attractive are the favorable tax benefits.

  • Deductibility of ESOP Contributions (both S and C Corporations) used for the purchase of company stock
  • Tax-deferred Sale to ESOP (C Corporation only) – allows a shareholder in a closely held C corporation to sell stock in the company and defer income taxes on the gain from the sale (known as a 1042 sale) by reinvesting the sale proceeds in qualified stocks and bonds.
  • Deductibility of Dividends (C Corporation) – a tax deduction is permitted for cash dividends paid on stock which has been purchased with an acquisition loan (to the extent the dividends are passed through to employees or used for acquisition loan payments).
  • S Corporation Tax Advantage – for an S Corporation, taxable income is passed through and included in the taxable income of shareholders. Since the ESOP is a tax exempt entity, it’s share of income is not taxed. This is extremely beneficial for a 100% ESOP owned S Corporation.

Especially with tax reform on the horizon, it is vital that the ESOP community works with members of Congress to not only protect these benefits, but also to expand them.

Two pro-ESOP bills have recently been introduced which support ESOPs and expand the benefits available.

The Promotion and Expansion of Private Employee Ownership Act of 2015 was introduced on May 6th in the Senate (S. 1212) with bipartisan support. This bill expands the availability of ESOPs to S Corporations and would also extend the Section 1042 gain-deferral provisions to S Corporations (currently available only to C Corporations). Sponsors of the bill include Sen. Amy Klobuchar (D-MN), Sen. Al Franken (D-MN), Sen. Tammy Baldwin (D-WI), Sen. John Thune (R-SD), Sen. Heidi Heitkamp (D-ND), and Sen. John Hoeven (R-ND).

The companion bill in the House of Representatives (H.R. 2096) was introduced on April 29th, also with bipartisan support. Sponsors of this bill include Rep. Erik Paulsen (R-MN), Rep. Timothy Walz (D-MN), Rep. Glen Grothman (R-WI), Rep. Ron Kind (D-WI), Rep. Gwen Moore (D-WI), Rep. Rod Blum (R-IA) and Rep. Kevin Cramer (R-ND).

Although action on these bills is unlikely until after the 2016 elections, we should still urge our Senators to sponsor S. 1212 and our Representatives to sponsor H.R. 2096 to promote ESOPs now.

The ESOP association has many tools available, including an advocacy kit, to assist with contacting your Senators and Representatives athttp://www.esopassociation.org/advocate/advocacy-kit. This kit has the complete listing of supporters as well as sample letters that should be sent to each member.

For additional information please contact Doug Johnson at djohnson@boulaygroup.com or at 952-841-3089.