Let’s look at the Tax Advantages

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 ESOP Tax Advantage Calculator™

01

Purchase Price is Deductible

The entire purchase price is deductible including the principal on the financing. It is the only tax-deductible debt in the Internal Revenue Code.

02

Sellers Defer Capital Gains

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.

03

ESOP Can Pay Off the Financing​

S corporation distributions are paid to the ESOP because the ESOP is a shareholder. These distributions can be used to pay off the ESOP financing. 

How Will It Look 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.

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Your Information & Inputs

Estimate the value of 100% of the company. This is not your gross revenue or net sales. Try 3-6 times your company’s EBITDA (earnings before interest, taxes depreciation and amortization), keeping in mind that your actual number might vary if there are special circumstances. If your company’s EBITDA is below $1.5M, your company is likely too small for a leveraged or financed ESOP buyout. A non-leveraged ESOP strategy might work, however.
If your company is a C corporation, the stock basis is the amount you initially paid for your stock. Often it is nominal or even zero if you are the founder. If you don’t know, enter zero. If your company is an S corporation, your basis will be higher. If you don’t know, your accumulated adjustments account (AAA) on your K-1 can serve as an estimate.
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Enter the approximate date on which you would sell your shares to the ESOP.
Please enter a number from 0 to 100.
Enter the percentage of the company to be sold to the ESOP. This is generally anywhere from 30% up to 100%. Sales may be below 30%, but this is the minimum sale percentage required to elect the tax deferred rollover under Internal Revenue Code Section 1042, which allows you to defer taxation on the sale to the ESOP by reinvesting in stocks and bonds of U.S. operating companies.
What percentage will be bank financed? (The model assumes the rest is seller-financed.)
Estimate the company’s “normalized” EBITDA going forward. “Normalized” means adding back or reducing for extraordinary and single-year items of income, loss, or deduction, and adding back any extraordinary compensation. Compensation expense reduces both taxable income and EBITDA and reduces the stock value.
Estimate the company’s annual “normalized” taxable income going forward.
After the transaction, how much will the company’s total payroll for all full time employees (i.e., working over 1,000 hours per year) be?
Please enter a number from 0 to 100.
Estimate the percentage of total annual W-2 payroll paid to the selling shareholder(s) and any of their family members who remain employed after the transaction. For example, if total payroll is $3,000,000 and the owner and their spouse each have W-2 earnings of $300,000, then the family compensation ($600,000) is 20% of total payroll.
Please enter a number from 0 to 100.
If your company is an S corporation, how much cash is distributed by the company to the shareholders each year? This should be entered as a percentage of K-1 income. Some distribute much more, sometimes up to 80%, because the shareholders want more of the profit each year. This can have a dramatic effect on the comparison. If your company is a C corporation, don’t change the default input of 0. The calculator will compare your C corporation to a typical S corporation transaction.

Financing Inputs

Please enter a number from 0 to 100.
The calculator assumes a combined federal and California state individual capital gains tax rate of 33%. Change this for your situation.
Please enter a number from 0 to 100.
Based on your tax return, enter the total tax rate you are paying on federal and any state income taxes combined.
Please enter a number from 0 to 100.
If you company is a C corporation, what rate of tax is the company paying? The calculator assumes that the company is paying taxes and will take advantage of the ESOP incentives. If you are currently using a tax-driven strategy to reduce the tax burden to zero, perhaps with salaries and bonuses, please estimate what the tax rate would be if the company was paying taxes without these strategies. The calculator starts with a combined federal and state tax rate of 33%.

Bank to Company Loan

Please enter a number from 0 to 100.
The purchase of stock can be financed by a bank, by the seller, or a combination of both. The interest rate for bank financing should be lower than seller financing. Perhaps start with your line of credit interest rate.
How long of a term do you expect the loan from the bank to be repaid? Five to seven years is a common term.

Seller Note

Seller financing assumes a higher rate than the bank rate. If the seller will take a note, enter the proposed rate here (for example, 4% above the bank rate).
Over how many years do you want to be repaid?

Your Information

The company numbers entered in this form and calculator results are confidential to you and are not shared with Employee Benefits Law Group.
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Estimate company’s “normalized” taxable income going forward. If you are currently reducing taxable income to close to zero with tax deductions, what would it be if a buyer wasn’t driving the taxable income down? If you don’t have any taxable income, then you won’t get tax benefits from an ESOPs deductions and incentives
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Estimate the company’s projected normalized gross revenue going forward.
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We assume 25% for W-2 eligible payroll.
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Transaction Values

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Bank to Company Loan Amortization

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Seller Note Loan Amortization

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Potential Results of an S Corporation ESOP Transaction

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Potential Results of a C corporation ESOP transaction

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Comparison of Tax Benefits and Costs, C corporation

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Comparison of Tax Benefits and Costs, S corporation

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Compare the Cost to Company of Seller Stock Redemption Without an ESOP

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Disclaimer:

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. This is not a solicitation or an advertisement for legal services. It is not a request for legal or tax advice. You will not be contacted about your use of this calculator unless you request it. Your privacy is important, and we respect that. Your company data is automatically deleted from our web server and is not retained beyond your session.
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