Tax Strategies for Employee‑Owned Companies

Employee‑owned companies enjoy distinct tax advantages—with careful planning and compliance.

Optimizing Tax Outcomes for Employee Owners

Transitioning to an ESOP is a powerful way to drive engagement, increase retention, and build a legacy. Yet, this transition also brings unique tax challenges and opportunities to the table. Our team helps you harness the full value of ownership with tax strategies for employee-owned businesses.

Tax Strategies for Employee-Owned Businesses

Employee-owned companies enjoy distinct tax advantages, but only with careful planning and compliance. Whether you’re considering an ESOP or already have an established plan, the right tax approach can mean significant savings for both your business and your employees.

RP&B’s ESOP tax strategies include:

• Ownership Transition Planning: Maximize deductions and credits during the shift to employee ownership.
• ESOP Contributions and Dividends: Creating and executing on a tax plan that maximizes tax savings while aligning with the business goals for employee allocations.
• Section 1042 Rollovers: Help sellers defer capital gains tax and promote a smooth transition.
• Estate and Charitable Planning: Meeting with the sellers’ advisors to assist on how to best utilize assets attained in the sale for both estate and charitable planning purposes.

Tax Benefits for Employee-Owned Businesses

Businesses with ESOPs enjoy a range of unique tax incentives that benefit all parties involved. Explore how ESOPs can provide your organization with substantial financial benefits and tax savings.

1. Tax-Deductible ESOP Contributions - Employer contributions to the ESOP, including those used to buy shares or repay ESOP loans, are generally fully tax-deductible, reducing the overall taxable income of your business.
2. Tax-Deferred Growth for Employees - Employees participating in the ESOP do not pay taxes on their shares or accumulated value until they receive distributions—typically at retirement. This facilitates long-term, tax-deferred savings for your team.
3. Tax-Free Income for S Corporations - An ESOP trust of an S Corporation is a tax-exempt entity, so the ESOP-owned portion of business profits is not subject to federal income tax.
   • If your ESOP owns 100% of the S Corporation, the business pays no federal income tax at the entity level.
4. Capital Gains Deferral for Selling Owners (Section 1042 Rollover) - In C Corporations, owners who sell at least 30% of the business to an ESOP may defer capital gains taxes by reinvesting in qualified securities, under IRS Section 1042.
   • This offers attractive succession planning options and rewards long-term owners.
5. Higher Deductibility Limits - Companies can deduct contributions to the ESOP up to 25% of eligible payroll. For leveraged ESOPs, payments on ESOP loans are generally deductible within set limits.
6. Deductible Dividends - C Corporations may deduct dividends paid on ESOP-held shares if those dividends are:
   • Paid directly to ESOP participants,
   • Used to repay an ESOP loan, or
   • Reinvested in stock by plan participants.