The Use of ESOPs to Finance Mergers and Acquisitions

Advantages to C Corporations Many companies that have ESOPs fail to realize that their ESOP can be used to the finance acquisitions with pre-tax dollars. Normally, when debt is incurred to finance an acquisition, only the interest payments are deductible.  Principal payments are not deductible.  However, if the acquisition is financed through an ESOP, both the interest and the principal payments will be fully deductible, and this will be true whether the plan sponsor is structured as a regular C corporation or as an S corporation. In addition, if both the acquiring company and the target company are structured as  regular C corporations, or both convert to C corporation status before consummating the merger, then the shareholders of the target corporation can qualify for tax-free rollover treatment upon the sale of their stock to the acquiring company’s ESOP.  This additional tax savings gives the acquiring company a distinct advantage in ... Read More..

22 ESOP Myths And Misconceptions

Click here to download the full article in pdf format ESOPs were first authorized by federal legislation in 1974. Since that date, there have been more than 25 separate pieces of legislation that have further defined what an ESOP is and what an ESOP is permitted to do. Despite this fact, there are more misconceptions about ESOPs than about any of the other similar financial tools that exist in the marketplace. The following describes some of the more prevalent myths and misconceptions regarding ESOPs. Hopefully, the explanations provided below will help to dispel many of the misconceptions that currently exist regarding these matters. Misconception # 1 ESOPs can only be adopted by regular C corporations False. More than half of all new ESOPs are installed by S corporations. Originally, ESOPs could only be adopted by regular C corporations. However, as a result of legislation in 1996, ESOPs can now also ... Read More..

The ESOP Association 2009 Year-End Legislative Update

S. 1612 – The ESOP Promotion and Improvement Act of 2009: On August 6, 2009, Senator Blanche L. Lincoln (D-AR) introduced S. 1612, the ESOP Promotion and Improvement Act of 2009. The legislation has four sections, including an entirely new proposal to remove a 35 year bias against ESOP companies by the Small Business Administration. One, S. 1612 would repeal the punitive 10% penalty tax on S corporations distributions from current earnings, also referred to as dividends, placed on the distributions from current earnings that are passed through to ESOP participants in cash. Two, S.1612 would clarifY that dividends paid by C corporations on ESOP stock are not a preference item in calculating the corporate alternative minimum tax. Three, S. 1612 improves the 1042 ESOP tax deferred rollover provisions by (a.) permitting sellers to the ESOP of an S corporation to utilize the ESOP tax benefit referred to as the ... Read More..

The ESOP Association and the Employee Ownership Foundation Release Results of the 2010 ESOP Company Survey

August 11, 2010 The ESOP Association and the Employee Ownership Foundation released today the results of a survey conducted among the Association’s 1,400 corporate members in the first quarter of 2010 which confirms positive benchmarks for ESOP (employee stock ownership plan) companies. The company survey is conducted every five years and was last completed in 2005. Prior to 2005, the survey was completed in 2000. The eye-opening statistics of the 2010 survey are the increase in age of the ESOP and account balances. In 2010, the average age of the ESOP was reported to be 15 years as opposed to prior years where the ESOPs reporting where much younger. In addition, the average account balance has risen dramatically to $195,222.65; a much higher figure which correlates with the age of ESOPs participating in this year’s survey. The eye-opening statistics of the 2010 survey are the increase in age of the ... Read More..

Tax Alert for Business Owners

Dear Business Owner, This may be the opportune time to take action to avoid the increase in capital gains tax rates that will take effect after 2010. As you may know, the Bush tax rate cuts, including the current 15% capital gains tax rate, are slated to expire at the end of 2010. In addition, if the U.S. economy starts to turn around in the third or fourth quarter of this year, we believe there is a strong possibility that the Obama budget for 2010 will propose an increase in the capital gains tax rate starting in 2010 rather than in 2011. Assuming that you have an interest in locking in the capital gains tax at the current rate but do not wish to sell your entire company to a third party, there are two tax strategies that you can use to lock in the current capital gains tax rate, ... Read More..

Highlights Of The Pension Protection Act Of 2006

I. PROVISIONS AFFECTING ESOPS S Corp UBIT Exemption The unrelated business income tax (“UBIT”) exemption that currently applies to S corporation ESOPs, together with the related §409(p) anti-abuse provisions, have been made permanent. These provisions were scheduled to expire at the end of 2010. As the result of PPA, these provisions have been made permanent, and S corporations that sponsor ESOPs will continue to be exempt from income tax and from UBIT to the extent that company stock is held by an ESOPs. ESOP Diversification PPA does not mandate any additional diversification requirements for ESOPs maintained by private companies. Similarly, PPA does not mandate any additional diversification requirements for ESOPs maintained by public companies, provided that the ESOP is a stand-alone plan. The following additional diversification requirements do apply for plan years after December 31, 2006 if the ESOP is maintained by a public company and the ESOP is combined with a ... Read More..