{"id":83,"date":"2020-09-09T17:58:04","date_gmt":"2020-09-09T17:58:04","guid":{"rendered":"https:\/\/www.managementconceptscpa.com\/blog\/?p=83"},"modified":"2020-09-09T17:58:04","modified_gmt":"2020-09-09T17:58:04","slug":"esops-offer-businesses-a-variety-of-potential-benefits","status":"publish","type":"post","link":"https:\/\/www.managementconceptscpa.com\/blog\/2020\/09\/09\/esops-offer-businesses-a-variety-of-potential-benefits\/","title":{"rendered":"ESOPs offer businesses a variety of potential benefits"},"content":{"rendered":"<p><img decoding=\"async\" src=\"https:\/\/s3.amazonaws.com\/snd-store\/a\/50515418\/09_02_20_1133552122_bb_560x292.jpg\" \/><\/p>\n<p>Wouldn\u2019t it be great if your employees worked as if they owned the company? An employee stock ownership plan (ESOP) could make this a reality.<\/p>\n<p>Under an ESOP, employee participants take part ownership of the business through a retirement savings arrangement. Meanwhile, the business and its existing owner(s) can benefit from some tax breaks, an extra-motivated workforce and a clearer path to a smooth succession.<\/p>\n<p><strong>How they work<\/strong><\/p>\n<p>To implement an ESOP, you establish a trust fund and either:<\/p>\n<ul>\n<li>Contribute shares of stock or money to buy the stock (an \u201cunleveraged\u201d ESOP), or<\/li>\n<li>Borrow funds to initially buy the stock, and then contribute cash to the plan to enable it to repay the loan (a \u201cleveraged\u201d ESOP).<\/li>\n<\/ul>\n<p>The shares in the trust are allocated to individual employees\u2019 accounts, often using a formula based on their respective compensation. The business must formally adopt the plan and submit plan documents to the IRS, along with certain forms.<\/p>\n<p><strong>Tax impact<\/strong><\/p>\n<p>Among the biggest benefits of an ESOP is that contributions to qualified retirement plans (including ESOPs) are typically tax-deductible for employers. However, employer contributions to all defined contribution plans, including ESOPs, are generally limited to 25% of covered payroll. But C\u00a0corporations with leveraged ESOPs can deduct contributions used to pay interest on the loans. That is, the interest isn\u2019t counted toward the 25% limit.<\/p>\n<p>Dividends paid on ESOP stock passed through to employees or used to repay an ESOP loan may be tax-deductible for C\u00a0corporations, so long as they\u2019re reasonable. Dividends voluntarily reinvested by employees in company stock in the ESOP also are usually deductible by the business. (Employees, however, should review the tax implications of dividends.)<\/p>\n<p>In another potential benefit, shareholders in some closely held C\u00a0corporations can sell stock to the ESOP and defer federal income taxes on any gains from the sales, with several stipulations. One is that the ESOP must own at least 30% of the company\u2019s stock immediately after the sale. In addition, the sellers must reinvest the proceeds (or an equivalent amount) in qualified replacement property securities of domestic operation corporations within a set period.<\/p>\n<p>Finally, when a business owner is ready to retire or otherwise depart the company, the business can make tax-deductible contributions to the ESOP to buy out the departing owner\u2019s shares or have the ESOP borrow money to buy the shares.<\/p>\n<p><strong>Risks to consider<\/strong><\/p>\n<p>An ESOP\u2019s tax impact for entity types other than C\u00a0corporations varies somewhat from what we\u2019ve discussed here. And while these plans do offer many potential benefits, they also present risks such as complexity of setup and administration and a strain on cash flow in some situations. Please contact us to discuss further. We can help you determine whether an ESOP would make sense for your business.<\/p>\n<p><em>\u00a9 2020<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Wouldn\u2019t it be great if your employees worked as if they owned the company? An employee stock ownership plan (ESOP) could make this a reality. Under an ESOP, employee participants take part ownership of the business through a retirement savings arrangement. Meanwhile, the business and its existing owner(s) can benefit from some tax breaks, an [&hellip;]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_genesis_hide_title":false,"_genesis_hide_breadcrumbs":false,"_genesis_hide_singular_image":false,"_genesis_hide_footer_widgets":false,"_genesis_custom_body_class":"","_genesis_custom_post_class":"","_genesis_layout":"","footnotes":""},"categories":[3,4],"tags":[],"_links":{"self":[{"href":"https:\/\/www.managementconceptscpa.com\/blog\/wp-json\/wp\/v2\/posts\/83"}],"collection":[{"href":"https:\/\/www.managementconceptscpa.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.managementconceptscpa.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.managementconceptscpa.com\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.managementconceptscpa.com\/blog\/wp-json\/wp\/v2\/comments?post=83"}],"version-history":[{"count":1,"href":"https:\/\/www.managementconceptscpa.com\/blog\/wp-json\/wp\/v2\/posts\/83\/revisions"}],"predecessor-version":[{"id":84,"href":"https:\/\/www.managementconceptscpa.com\/blog\/wp-json\/wp\/v2\/posts\/83\/revisions\/84"}],"wp:attachment":[{"href":"https:\/\/www.managementconceptscpa.com\/blog\/wp-json\/wp\/v2\/media?parent=83"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.managementconceptscpa.com\/blog\/wp-json\/wp\/v2\/categories?post=83"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.managementconceptscpa.com\/blog\/wp-json\/wp\/v2\/tags?post=83"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}