The Consolidate Appropriations Act of 2023 (the “Act”) is an amalgamation of separate bills signed into law at the end of 2022 to collectively authorize $1.7 trillion in additional U.S. Government spending. Included in the package is the “SECURE 2.0 ACT of 2022” which includes a number of provisions that generally favor and promote employee ownership through Employee Stock Ownership Plans (ESOPs). Here are the highlights:

  • The current provisions of the Internal Revenue Code allow selling shareholders in private C corporations to defer tax on the sale of stock to an ESOP by investing the sale proceeds in securities of domestic operating corporations. The Act extends that benefit to owners of S corporations. However, the tax deferral for sales of S corporation stock is limited to ten percent (10%) of the sale proceeds (C corporation owners can defer tax on all of their sale proceeds) and is not effective until 2028. Bear in mind that ESOPs that are one hundred percent (100%) owned by S corporations provide their own unique tax advantage: those corporations operate free of income tax (this is not the case with C corporation ESOPs).

  • Funding is provided to the U.S. Department of Labor (DOL) and state programs to be used for “providing education and outreach to inform employees and employers about the possibilities and benefits of employee ownership and business ownership succession planning...” In other words, the Act includes Federal funding of an initiative to promote employee ownership though ESOPs and similar arrangements.

  • The DOL is directed to develop more detailed and exact guidelines for the valuation of the shares of privately owned corporations purchased in an ESOP transaction. Better guidance on how the “fair market value” of such stock is determined by valuation experts is intended to significantly reduce the risk of litigation over the validity of ESOP stock purchase transactions. A higher degree of certainty in this area may interest more business owners in ESOP transactions and may encourage more institutional lenders to make ESOP loans.

TAKEAWAYS: The general legislative trend has favored ESOPs on a bipartisan basis for several decades. That trend continues with the adoption of the SECURE 2.0 Act of 2022. Having experienced years of favorable legislative action, it seems likely that ESOPs will not be subject to restriction in the name of legislative “reform” at any time in the near future. Entrepreneurs and other business owners can rely on the availability of ESOPs as a unique succession planning tool that allows the tax-advantaged sale of company stock while at the same time maintaining the continuity and independence of the legacy business.

Leave a comment

Your Email will not be published with a comment

This website uses cookies to enhance your browsing experience and provide you with personalized services. By continuing to use this site, you consent to the use of cookies. See our Terms of Engagement to learn more.