“Tax-Free” Rollover of Stock Sold to the ESOP

[IRC § 1042]

Shareholders of a closely-held C corporation may sell their stock to the ESOP, and under certain circumstances pay no tax, provided the proceeds are reinvested in the securities of operating domestic, public or private corporations within twelve months after or three months before the sale to the ESOP [IRC 1042].  In order to qualify, the stock sold cannot be “Section 83” stock, and it must be held for a three-year period prior to the sale to the ESOP.

Tax-Deductible Loan Payments

[IRC § 404(a)(9)]

Contributions used to make ESOP loan principal payments are tax deductible to the corporation.

Tax-Free S Corporation Income

[IRC § 409(p) and 512(a)]

Income attributable to stock owned by an S corporation ESOP is not subject to federal tax.  This benefit may not be available for smaller companies with approximately ten or fewer employees, due to IRC 409(p).

Tax-Deductible Dividends When Paid Through the ESOP

[IRC § 404 (k)]

Dividends on C corporation ESOP stock that are “passed through” the ESOP to participants or used to repay ESOP loans may be tax deductible to the corporation. These dividends are not counted in the normal contribution limit of 25% of payroll.