Why an Employee Stock Ownership Plan (ESOP)?
Is an ESOP for you?
An ESOP may be for you if you want to:
- attract, reward, and retain employees
- buy out one or more owners
- create a more motivated workforce
- raise capital or build debt capacity
- provide a takeover defense
- establish a market for stock in a closely held business
- realize the tax benefits
Tax advantages of an ESOP
Congress has created several tax incentives that make ESOPs beneficial, including:
- Participants may experience tax-deferred retirement savings. Participants are not taxed on stock that the ESOP acquires and allocates to the account the plan holds for their benefit until they receive a distribution.
- You may use tax-deductible contributions to acquire company stock. The trust may borrow money to buy the stock. The company may deduct contributions to the ESOP used to make both interest and principal payments on the loan.
- If you're a private company, you may be able to defer capital gains taxes. You may qualify for rollover treatment that defers capital gains taxes on sales of stock to an ESOP.
- You may be able to deduct dividends or lower tax liability. In some cases, a corporation may deduct dividends it pays on stock an ESOP holds or, where the ESOP company elects to be taxed as an S Corporation, to completely avoid some or all of its tax liability.
While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that The Principal is not rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.
