
Here are Your Results
You can defer your capital gains tax on the sale and then become a 100% employee-owned, income tax-free corporation. These charts compare the tax subsidy in a C Corporation and S Corporation scenario.
Tax Benefits to the Company
Total tax incentives – the tax “subsidy”
There are three ESOP income tax incentives for the Company funding the ESOP purchasing 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 deductible loan principal 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 w/o 1042, Plus ESOP Benefits
After-Tax Capital Gain: | |
After-Tax Interest on Seller Note: | |
Seller & Family ESOP Accounts: | |
Supplemental Distributions: | |
Total Advantage: |
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.
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