|Comparison of Corporation’s Tax Benefits||C Corporation|
|Total principal and interest cash cost to the company*||$792,528||$792,528|
|Tax savings from deducting principal on the loan by funding via the ESOP||$198,000||$138,600|
|ESOP’s share of S Corporation’s distributions used to pay off the loan. This is “free cash” the ESOP can use to make loan payments**||N/A||$180,000|
|Total company tax “subsidy” from funding transaction with an ESOP||$198,000||$380,546|
|Net cash cost of financing transaction after ESOP tax “subsidy”||$594,528||$350,037|
|Company’s tax subsidy as a % of deal cost||25%||48%|
|Seller’s Proceeds From The Sale|
|Tax-deferred proceeds to seller with a 1042 rollover (only available if company revokes S election or is already a C corporation)||$600,000||N/A|
|After-tax proceeds to seller without a 1042 rollover||N/A||$402,000|
|Stock account of family members participating in the ESOP (not available with 1042 election)***||N/A||$120,000|
|Total value to seller and family||$660,850||$582,850|
|Total supplemental S Corporation cash distributions to the seller in the 5-year period after the transaction****||N/A||-$1,207,500|
|Company Fair Market Value||$2,000,000|
|Corporation’s Projected Income||$1,500,000|
|Percentage to Sell||30%|
|W-2 Total Family Compensation||20%|
|Individual Tax Rate||33%|
|Individual Capital Gains Rate||33%|
|Interest on Bank or Seller Financing||7%|
|Rate of S Corporation Distributions||10%|
This 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 principals, above. There are many ways to structure ESOP transactions which 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 period 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 like they too small for many transaction structures.
* Assumes financing over a 10-year period this is reasonable for a seller note. Bank financing is typically shorter. In any situation financing is likely having a stated term equal for a C corporation or an s corporation
** This will be much higher if you reduce the company’s contribution used to pay the loan.
***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 S Status for 5 years to do a 1042 transaction. If the loan is longer than 5 years, then as a comparative subsidy it could be considered to be double this amount.
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