ESOP Distribution & Taxation: How Does it Work? What Are the Rules?

One of an Employee Stock Ownership Plan’s (ESOP) distinctive advantages is its value as a qualified retirement plan. Questions about how ESOP share values are distributed and taxed are important not only to ESOP companies’ leadership teams, but also to employees.

As a defined contribution benefit plan, an ESOP can be an important part of an employee’s retirement savings. For this reason, it’s vital for employees to understand the basics about taxation of ESOP distributions.

Number Nine - Benefit of Selling your Company to an ESOP










Benefit #9 of selling to an ESOP: It creates the liquidity event now. This enables shareholders to diversify and begin to access value prior to retirement. The ESOP cannot pay a synergistic premium. This enables shareholders to diversify and begin to access value prior to retirement. Selling to an ESOP is always a stock sale which is more favorable from a tax standpoint than a traditional asset sale. 

Additional key tax benefit;  The portion of a company owned by an S Corporation ESOP is not subject to. federal or state income taxation, increasing cash flow and providing the company with a competitive advantage. This means that S Corporations that are 100% ESOP-owned are not subject to any federal or state income taxes, increasing cash flow and providing the company with a competitive advantage. 

Is An ESOP Right For Your Company

Check out this brief animated video to learn more about ESOPs. 

Number Eight - Benefit of Selling your Company to an ESOP










Benefit #8 of selling to an ESOP: It provides more ESOP after-tax payments than a sale to a third party. The ESOP cannot pay a synergistic premium. Selling to an ESOP is always a stock sale which is more favorable from a tax standpoint than a traditional asset sale. 

When analyzing the purchase price, it is essential to consider the after-tax proceeds when comparing an ESOP transaction sale to a third-party sale. In a stock sale, the seller is generally eligible for long-term capital gain treatment at the current long-term capital gains rate. The more common sale alternative, the asset sale, is generally taxed at the higher ordinary-income rate.  

Additional key tax benefit;  The portion of a company owned by an S Corporation ESOP is not subject to. federal or state income taxation, increasing cash flow and providing the company with a competitive advantage. This means that S Corporations that are 100% ESOP-owned are not subject to any federal or state income taxes, increasing cash flow and providing the company with a competitive advantage. 

Is An ESOP Right For Your Company

Check out this brief animated video to learn more about ESOPs. 

One Major ESOP Taxation Advantage: An ESOP Company Pays No Federal or State Income Tax

When company leadership considers whether an ESOP is a good fit, they must carefully consider the pros and cons of the decision, including how transitioning to an ESOP may impact a company’s tax obligations — and how ESOP taxation rules may provide a competitive advantage to the company.

The portion of a company owned by an S corporation ESOP is not subject to federal or state income taxation.

Number Six - Benefit of Selling your Company to an ESOP










Benefit #6 of selling to an ESOP: It preserves the company's legacy and values in the local community by creating wealth and sustainable employment through employee ownership. ESOPs reward employees by providing them with an ownership stake in the company they work for and help build. It allows the transfer of ownership to employees at no cost and provide employee ownership without the need for employees to have or raise capital. In some cases, an ESOP can be an attractive succession option for family-owned businesses. 

Did you know? Employee-owned companies are 235% better at job retention. (NCEO)  

Additional key tax benefit;  The portion of a company owned by an S Corporation ESOP is not subject to. federal or state income taxation, increasing cash flow and providing the company with a competitive advantage. This means that S Corporations that are 100% ESOP-owned are not subject to any federal or state income taxes, increasing cash flow and providing the company with a competitive advantage. 

Is An ESOP Right For Your Company

Check out this brief animated video to learn more about ESOPs. 

Number Five - Benefit of Selling your Company to an ESOP










Benefit #5 of selling to an ESOP: It improves company performance by aligning the financial objectives of the company and employees and establishing an ownership culture. ESOPs reward employees by providing them with an ownership stake in the company they work for and help build. It allows the transfer of ownership to employees at no cost and provide employee ownership without the need for employees to have or raise capital. Building an ownership culture by combining meaningful employee ownership and participative management creates a greater sense of pride for the employees, increased engagement and a competitive advantage for a company. Did you know? Employee-owned companies are 235% better at job retention. (Source: NCEO, 2018)  

Additional key tax benefit;  The portion of a company owned by an S Corporation ESOP is not subject to. federal or state income taxation, increasing cash flow and providing the company with a competitive advantage. This means that S Corporations that are 100% ESOP-owned are not subject to any federal or state income taxes, increasing cash flow and providing the company with a competitive advantage. 

Is An ESOP Right For Your Company

Check out this brief animated video to learn more about ESOPs. 

Number Four - Benefit of Selling your Company to an ESOP







 



Benefit #4 of selling to an ESOP: It provides employee ownership as an additional employee benefit to help recruit and retain employees. ESOPs reward employees by providing them with an ownership stake in the company they work for and help build. It allows the transfer of ownership to employees at no cost and provide employee ownership without the need for employees to have or raise capital. Building an ownership culture by combining meaningful employee ownership and participative management creates a greater sense of pride for the employees, increased engagement and a competitive advantage for a company. Did you know? Employee-owned companies are 235% better at job retention. (Source: NCEO, 2018)  

Additional key tax benefit;  The portion of a company owned by an S Corporation ESOP is not subject to. federal or state income taxation, increasing cash flow and providing the company with a competitive advantage. This means that S Corporations that are 100% ESOP-owned are not subject to any federal or state income taxes, increasing cash flow and providing the company with a competitive advantage. 

Is An ESOP Right For Your Company

Check out this brief animated video to learn more about ESOPs. 

Number Three - Benefit of Selling your Company to an ESOP







 



Benefit #3 of selling to an ESOP: The 25% of eligible compensation tax deduction provides the funding for the ESOP transaction expenses.  An ESOP is one of the most cash and tax-efficient succession plans available to business owners. The ESOP trust is an S Corporation shareholder that is a tax-exempt entity not subject to income taxes. S corporations are pass-through entities that pass through their corporate income to their shareholders for federal and state income tax reporting purposes. Each year the shareholders receive an IRS Form K-1 and report the flow-through of the income on their personal tax returns based on their individual federal and state income tax rates.

Note; The portion of a company owned by an S Corporation ESOP is not subject to federal or state income taxation, increasing cash flow and providing the company with a competitive advantage. This means that S Corporations that are 100% ESOP-owned are not subject to any federal or state income taxes, increasing cash flow and providing the company with a competitive advantage. 

Is An ESOP Right For Your Company

Check out this brief animated video to learn more about ESOPs. 

Number Two - Benefit of Selling your Company to an ESOP





 

 

 

 

Benefit #2 of selling to an ESOP: The annual company tax and cash flow savings are greater than the annual ESOP expenses.  An ESOP is one of the most cash and tax-efficient succession plans available to business owners. The ESOP trust is an S Corporation shareholder that is a tax-exempt entity not subject to income taxes. S corporations are pass-through entities that pass through their corporate income to their shareholders for federal and state income tax reporting purposes. Each year the shareholders receive an IRS Form K-1 and report the flow-through of the income on their personal tax returns based on their individual federal and state income tax rates.

The portion of a company owned by an S Corporation ESOP is not subject to federal or state income taxation, increasing cash flow and providing the company with a competitive advantage. This means that S Corporations that are 100% ESOP-owned are not subject to any federal or state income taxes, increasing cash flow and providing the company with a competitive advantage. 

Is An ESOP Right For Your Company

Check out this brief animated video to learn more about ESOPs. 

Number One - Benefit of Selling your Company to an ESOP





 

 

 

 

Benefit #1 of selling to an ESOP: The sale of the company to the ESOP is being paid for by the company tax and cash flow savings over time.  An ESOP is one of the most cash and tax-efficient succession plans available to business owners. 

The portion of a company owned by an S Corporation ESOP is not subject to federal or state income taxation, increasing cash flow and providing the company with a competitive advantage. This means that S Corporations that are 100% ESOP-owned are not subject to any federal or state income taxes, increasing cash flow and providing the company with a competitive advantage. 

Is An ESOP Right For Your Company

Check out this brief animated video to learn more about ESOPs. 

Keep Your ESOP On Track and On Time
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