When company leadership evaluates whether an ESOP is a good fit, they must carefully consider how transitioning to an ESOP may impact a company’s tax obligations — and how ESOP taxation rules may provide a competitive advantage to the company.
The portion of a company owned by an S corporation ESOP is not subject to federal or state income taxation.
This means that an S corporation that is 100% ESOP-owned is not subject to any federal or state income taxes.*
Practically speaking, in terms of running the business, this primary ESOP tax benefit can result in increased cash flow and a clear competitive advantage for the company.
To provide further clarification, we’re answering some of the most-asked questions about ESOP taxes:
How are S corporation ESOP companies not subject to income taxes?
What are the benefits of an ESOP’s federal and state income tax-exempt status?
Are ESOP tax advantages an unintended loophole in the Internal Revenue Code?
How can the government afford the ESOP tax benefits? Doesn’t the IRS stand to lose revenue?
How does the government regulate ESOP tax benefits to prevent abuse?
