This potential exit strategy can provide tax benefits to both the owner and the company such as:
- Deferral of capital gain from the sale of stock to an ESOP (if certain conditions are met)
- ESOP’s are tax-exempt thus any profits from an S-Corporation owned by an ESOP are not subject to federal income tax (and potentially certain states)
- Contributions to an ESOP from the company are tax deductible
- Dividends paid from stock held by an ESOP are tax deductible to C-Corporations
- Estate and Gift planning opportunities
Although there are many tax benefits of selling a portfolio company to an ESOP, there are also many considerations, both tax and non-tax, to take into place when structuring this type of sale.