ESOPs Could Help Businesses Avoid Tax Increases

The increase in taxes in 2013 will likely hit business owners looking to sell their businesses the hardest. This is especially true if the owner of the business has a large portion of their wealth tied up in their enterprise. These owners could potently lose a significant amount of their assets. The primary concern for business owners is that the capital gains tax rate is set to increase by 5% from 15% to 20%. On top of that increase, the Patient Protection and Affordable Health Care Act or Obamacare is suppose to add an additional 3.8% to the overall rate for certain individuals. Furthermore, many businesses will not be able to take as much of an advantage on itemized deductions as before; thus, this could boost the effective capital gains tax to about 25%. For certain taxpayers in certain states, the burden could be more than this because of the addition of applicable state capital gains taxes. 

To help business owners reduce or eliminate their tax liability, an owner might want to consider using an ESOP or an employee stock ownership plan. ESOPs are considered to be a qualified retirement plan. The plan primary invests in the company’s stock. According to LifeHealthPro, “ESOPs allow owners to sell their stock and diversify their wealth on a tax-favorable basis, while effectively retaining control of their business.” ESOPs can also be used to transfer control of the business. It is important to remember that ESOPs must comply with the tax code, particularly Section 1042. That section governs the requirements for avoiding a capital gains on the sale of company stock.

See Jerry L. Ripperger & Brian D. Hector, ESOPs: A Plan to Help Business Owners Avoid “Taxmageddon”, LifeHealthPro, Dec. 10, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.