A non-leveraged ESOP is a type of ESOP that does not involve borrowed funds to acquire the sponsoring employer’s stock. It is funded by contributions of cash or stock directly from the employer sponsor. In this video, we discuss the tax benefits of non-leveraged ESOPs.
There are three tax benefits for non-leveraged ESOPs.
- The corporation can take a deduction for either cash or stock that is contributed to the plan.
- The ESOP, even though it’s not leveraged, can purchase shares from the selling shareholder allowing the shareholder to elect to defer the capital gain on that transaction by participating in a Code section 1042 transaction.
- Once the shares are in the ESOP, the corporation can take a deduction for dividends that may be paid on the stock. If the stock is S corporation stock, earnings from the S corporation can be reported to the tax-exempt trust and escape federal and often times state compensation.