By Lian Gravelle, Esq.
As 2017 begins under a Trump presidency, many business owners question whether this is the year to sell their business. If so, what will be the tax implications? Will Congress pass new tax laws and regulations that will have a beneficial impact on the taxes paid upon sale of a company or will the impact be negative? Will the middle market companies feel the changes as much, or more, than the large corporations?
Employee stock ownership plans (“ESOP”) already bestow a favorable tax treatment on selling shareholders, the sponsoring corporation, and the employees who participate in an ESOP. In a sale to an ESOP, a selling shareholder may be able to defer recognition of the capital gains from the sale of the business possibly forever. This may be accomplished through a Code Section 1042 exchange in which the shareholder reinvests the proceeds of the sale in qualified replacement property. The corporation receives tax benefits by making tax deductible contributions to the ESOP. Additionally, an S corporation ESOP pays no federal tax to the extent the ESOP is a shareholder. An S corporation owned 100 percent by the ESOP will pay no federal tax. Lastly, the employees will receive distributions from the ESOP on a tax advantaged basis the same as any other qualified retirement plan.
The impact of taxes on anyone remains uncertain as the transition to a Trump presidency and Republican Congress takes shape. However, an ESOP will likely retain these tax advantages and therefore, examining whether an ESOP is the correct transition mechanism should be part of any business owners exit planning.
Lian Gravelle, Esq., is an ESOP compliance counsel who works at ESOP Plus®: Schatz Brown Glassman LLP in Rochester. Visit www.esopplus.com or email firstname.lastname@example.org.