Our main clients are closely held businesses (and their owners), so business and individual planning are often tied at the hip in our office.
With what appears to be inevitable rising taxes, both business and individual, in a still tough business environment we are having to look hard for tax advantaged strategies that (at a minimum) won't hurt the underlying business operations.
One of the strategies that keeps popping up are ESOPs (employee stock ownership plans).
Basically, ESOPs have some commonly stated benefits that include:
1. Capital gains tax deferral (IRC Section 1042); **this is the one that gets all the press
2. Tax free income to the ESOP from an S-corp.;
3. Employee motivation and retention; and
4. Succession planning.
ESOPs have been bounced around in our offices for a long time, but we seem to be finding more situations that fit than in the past. I think that is because in the past, most of our clients were looking at a leveraged ESOP as a tax free exit (#1 above) and often the underlying economics didn't work, but recently we have had some clients looking at ESOPs for other reasons and the results seem to be more favorable.
There are, of course, a lot of factors to to look at before anyone pulls the trigger on an ESOP, but it looks like we may be seeing more of them in our future and they are definitely something to consider in the right situation.
