Tax Benefits to the Company

Total tax incentives – the tax “subsidy”

There are three ESOP income tax incentives for the company when it funds the ESOP’s purchase of stock. One of them is available for C corporations. All three are available for S corporations. They are:

  • The company may deduct the principal paid on an ESOP loan used to buy stock – the only tax-deduction of loan principal provided in the Internal Revenue Code.
  • S corporation cash distributions can be used by the ESOP to pay for its stock.
  • If the loan is paid off faster using S corporation distributions, the company saves Interest expense on the loans.

Company Transaction Benefits

C Corporation Subsidy

or ~ of deal cost

S Corporation Subsidy

or ~ of deal cost

Seller Transaction Benefits

C Corporation With 1042 Rollover

Deferred Capital Gain:
After-Tax Interest on Seller Note:
Total Advantage:

S Corporation Without 1042, Plus ESOP Benefits

After-Tax Capital Gain:
After-Tax Interest on Seller Note:
Seller & Family ESOP Accounts:
Supplemental Distributions:
Total Advantage:

** Family stock account values are not increased for the share price due to company growth over the term of the loan. This is simply the family’s percentage of the stock value purchased by the ESOP. It also does not include any S corporation distribution accumulations in the account.  Actual account values will vary.

*** As an example, we assume the seller doesn’t get this if the transaction requires revoking the company’s S status for five years to do a 1042 transaction. If the loan is longer than five years, then as a comparative subsidy it could be considered to be double this amount.

The ESOP Tax Advantage Calculator is a simple example of the tax benefits afforded to employee stock ownership plans (ESOPs). Its purpose is to display what the potential tax benefits may be based on the three tax principles discussed. There are many ways to structure ESOP transactions that will affect these tax benefits. A full feasibility study will project the advantages tailored to your potential transaction. Your taxable income needs to be sufficient to permit 100% of the loan amortization payments to be deductible. If you do not have sufficient taxable income for this, then you are likely too small for an ESOP.  If your EBITDA is below $1,500,000, you are likely too small for many transaction structures. 

Disclaimer

This calculator is for your information only. It is intended to inform you of the tax benefits of an ESOP. The specifics of your own financial situation and your company’s tax conditions, as well as the specific decisions you make when designing the ESOP transaction and financing, will affect your actual transaction tax benefits. The calculator is not a solicitation or an advertisement for legal services, nor is it a request for legal or tax advice. Your privacy is important, and we respect that. The data you entered will not be retained or used in any manner other than to show you your results.