You can defer your capital gains tax on the sale and then become a 100% employee-owned, income tax-free corporation. Here are the three principles you need to know:
- The entire purchase price is deductible including the principal on the financing. It is the only tax-deductible debt in the Internal Revenue Code.
- Sellers can elect to defer their capital gains tax on the sale of C corporation stock by making an IRC section 1042 election and reinvesting their proceeds into stocks and bonds of domestic corporations.
- S corporation distributions, that you otherwise would have used to pay shareholder income taxes, will be paid to the ESOP because the ESOP is a shareholder and the ESOP can use the cash to pay off the ESOP financing. This is a direct tax subsidy.
How Will It Work for You?
You can test out assumptions for your situation using our calculator. The calculator shows you what the cost of your transaction might be and the associated tax benefits.
This calculator is for your information only. It is intended to inform you of the tax benefits of an ESOP. There are many forms of an ESOP transaction that will affect your actual transaction tax benefits.
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