ESOPs: Savvy Strategy for Tax Management, Succession, and Continuity

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    ESOPs: Savvy Strategy for Tax Management, Succession, and Continuity eBook Download Product #: PMA1205E
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Changing demographics, impending changes in taxation, and challenging economic conditions have made ESOPs a creative strategy to ensure organization survival and success. This publication defines issues that must be fully considered before installing an ESOP, and highlights the common attributes of successful installations. Use this book to chart a course through succession issues and transition ownership issues with a minimum impact to financial results. The book offers you practical strategies to deal with current economic realities and taxation challenges, including the following:

  • Increasing tax rates in the near future will make ESOPs a tax efficient option for business owners.
  • In recessionary times ESOPs control the succession process versus letting probate and inheritance taxes jeopardize the survival of their organization.
  • Financing for almost any business transaction is difficult; ESOPs are very seller finance friendly.
  • ESOPs represent an effective exit vehicle for Baby Boomer owners.

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System Requirements

Table of Contents

  • Overview (covers issues arising from the post 2008 financial meltdown and recession)

  • Ch 1: ESOP History and Background

  • Ch 2: Significant Events and Organizations

  • Ch 3: ESOP Transaction Mechanics (ERISA contribution limits)

  • Ch 4: ESOP Valuations

  • Ch 5: ESOP Transactions “C” Corporations (Case study)

  • Ch 6: ESOP Transactions “S” Corporations (Case study)

  • Ch 7: Advanced ESOP Applications

  • Ch 8: Administration Considerations (overview of ESOP mechanics)

  • Ch 9 : Financial Considerations (including the effects of the great recession starting in 2008)

  • Ch 10: Practical Considerations and ESOP ResourcesOverview (covers issues arising from the post 2008 financial meltdown and recession)


Finance Corporate Acquisitions

An ESOP may be creatively used to acquire another company with pretax dollars. The company may also use the ESOP to acquire such things as equipment and facilities using pretax dollars.

An Incentive to Increase Employee Productivity and Retain Personnel

Studies have demonstrated that employees are more productive when they understand they have a direct vested interest in the success of the company. Providing an ESOP and communicating the benefits of employee ownership are typically a winning combination that increases the sales and profitability of the employer.

  • As the markets become more competitive, employers often understand that it is increasingly difficult to retain the best employees. Employers install ESOPs with the purpose of providing a vested interest among the employees in the financial outcome of the company.
  • When associates are respected and treated as owners, many companies discover that turnover significantly decreases. This is particularly important when employees possess a high level of skills.
  • One creative CPA firm, Saltz, Shamis & Goldfarb, adopted an ESOP for all its professional associates. Providing an equity interest in the firm was extended to all members on the professional staff, not just a limited number of partners. For more information, please read the article “A Piece of the Action” in the August 1996 issue of the Journal of Accountancy.

Provide a Succession Plan

The ESOP is used as part of an overall succession plan to pass control of a company to the next generation of managers and employees. If the ESOP uses debt to acquire the stock in the company, both the interest on the loan and the debt principal are deductible for tax purposes. This tax saving, deducting debt principal, is often significant. It means that the company may pass to the next generation of owners using pretax dollars, not after tax dollars.

Provide Liquidity in Divorce Situations

The traditional use for an ESOP is an exit vehicle for a shareholder typically facing such things as either retirement or a significant lessening of involvement in the business. This application may be invoked during a divorce when one of the major assets in the family is a closely held business. Divorce situations involving closely held companies often become highly complicated and very emotional.

The consideration of an ESOP under such circumstances may be a viable alternative for the parties to consider. An equity interest in the business is sold to an ESOP tax free, and liquidity is raised for settlement purposes. If debt is incurred to purchase the stock, the debt will be repaid with pretax dollars because the contributions to the ESOP within payroll limits are deductible.

If an ESOP is installed, the employees of the company gain an equity interest in the business. Under such potential circumstances, it is hoped that the potential ESOP is still installed with the spirit of providing the employees with a benefit that will ultimately be beneficial for all parties.

Provide Negotiating Leverage for Any Proposed Transaction

Typically, if business owners are considering transition options, they will be in a stronger negotiating position if options exist. An ESOP is not necessarily the best option for many potential applications for any number of good reasons. However, knowledge of a potential ESOP will frequently enhance negotiating positions. The consideration of an ESOP is almost always an option that is controlled by the controlling shareholder(s) of a company.

If an ESOP is to be considered under such circumstances, it is important to underscore that the standard of value for a potential ESOP transaction is fair market value (as defined by the IRS) and adequate consideration (as defined by the Department of Labor).

About the Authors

Scott D. Miller, CPA/ABV, CVA

Scott Miller, CPA/ABV, CVA

About the Publisher


About the AICPA The American Institute of CPAs is the world’s largest member association representing the accounting profession, with more than 412,000 members in 144 countries, and a history of serving the public interest since 1887. AICPA members represent many areas of practice, including business and industry, public practice, government, education and consulting. The AICPA sets ethical standards for the profession and U.S. auditing standards for private companies, nonprofit organizations, federal, state and local governments. It develops and grades the Uniform CPA Examination, and offers specialty credentials for CPAs who concentrate on personal financial planning; forensic accounting; business valuation; and information management and technology assurance. Through a joint venture with the Chartered Institute of Management Accountants, it has established the Chartered Global Management Accountant designation, which sets a new standard for global recognition of management accounting.