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C Corporation ESOPs

Helping You Get the Most Out of Your C Corporation ESOP

Most corporations, those that are called C corporations (because they are taxed under Subchapter C of the Internal Revenue Code), enjoy unique and almost legendary ESOP tax advantages that have been the driving force in the growth of ESOPs since the mid- 1980s. Employee Benefits Law Group guides its C corporation clients through these incentives and tax deduction opportunities with a view to the client feeling assured that they have prudently planned their transaction funding and benefit plans, while optimizing the tax efficiencies of their C corporation ESOP – even when compared to the alternatives available for S corporations.

We'll help any C corporation explore all available ESOP options.

In very general terms, C corporation ESOPs allow:

  • Selling shareholders to defer their capital gains tax on the sale of their shares to an ESOP.
  • Corporations to deduct up to more than twice the normal profit-sharing plan limit to fund an ESOP (50% of eligible compensation, plus interest on ESOP loans, rather than just 25%).
  • Deductions for dividends paid on ESOP stock used to make payments on an ESOP loan or passed through to ESOP participants.
  • Departing employees to get capital gains treatment on the appreciation in their ESOP shares.

In some cases, the C corporation incentives are not ideal and a transition to S corporation status is the better path. In comparison, some S corporation clients conclude that these incentives are compelling enough to revoke their subchapter S elections. It is also not unusual to take advantage of the C corporation incentives and then make the switch to S corporation status.

Objective guidance, from a trusted advisor, that fully understands the complexities of these comparisons, tax implications and sometimes trade-offs of each option is imperative. They require careful consideration to determine if they're the right combination of incentives to meet objectives; or to find alternatives, if necessary or better for the client.