Prior to 1997, S corporations could not sponsor an Employee Stock Ownership Plan (“ESOP”) because a tax-exempt trust could not be an S corporation shareholder.
Subsequent rules and regulations have eliminated this restriction, allowing S corporations (and/or C Corporations considering an S-election) to take advantage of powerful tax savings associated with maintaining an ESOP, including non-taxability of S corporation earnings flowing to the ESOP’s trust to the extent of its ownership.
In an effort to foster the growth of ESOPs sponsored by S corporations, a bipartisan group of senators recently introduced new legislation that is designed to provide additional tax incentives for S corporation owners when establishing or expanding employee ownership under an ESOP. The new bill is known as the “Promotion and Expansion of Private Employee Ownership Act of 2011.”
If the bill is passed, owners would be permitted to defer taxation of capital gains associated with the sale of securities to an ESOP sponsored by a S corporation, as long as those proceeds are subsequently invested in U.S. securities (a benefit currently available to owners of C corporations under IRC 1042).
The new law would also provide a technical assistance office within the Treasury Department and protection for small businesses to ensure ongoing benefits that are dependent on its ownership structure (minority-owned, woman-owned, etc.), regardless of the ESOP’s ownership.
This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.