Employee-Owned S Corporations of America recently held its annual Federal Policy Conference in Washington, D.C. ESCA speaks exclusively for employee-owned S Corporations and is active in promoting the growth of Employee Stock Ownership Plans.
Three U.S. senators addressed the group: Patty Murray, D-Washington, Rob Portman, R-Ohio and John Cornyn, R-Texas. All three agreed on one very important point — tax reform is not a nice to have, it is a must-have.
They also agreed that updating the tax code was way past due. The last major reform in the U.S. was the Tax Reform Act of 1986 — 28 years ago. How we get there and what the end product looks like is unknown and there will certainly be a lot of opinions helping shape the result.
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Both business owners and employees have an interest in preserving the tax status of ESOPs. Current tax provisions include:
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The company can deduct contributions to the ESOP as an ordinary business expense.
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For S Corporations, earnings that flow through to the ESOP as a shareholder are not currently taxable to the ESOP trust for federal — and in many instances state — income taxes.
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Owners of C corporations that sell at least 30 percent of the company to the ESOP can potentially defer or eliminate recognition of capital gains taxes (Internal Revenue Code Section 1042 exchange).
The benefits of ESOPs are plentiful. Since ESOPs are qualified retirement plans, they must pass minimum participation requirements. As a result, ownership is not concentrated in the hands of a few key staff or family members, but instead, broad groups of employees that can all share in the benefits of the plan through company ownership.
An ESOP can also generate a significant amount of retirement savings. Every day we hear about how workers aren't saving enough for retirement. An ESOP can be an effective approach to helping employees close the savings gap. Corey Rosen, senior staff member at the National Center for Employee Ownership, found that employees who work for companies that sponsor an ESOP have 2.5 times the retirement assets of those not in these plans.
ESOPs are good public policy and should be maintained, if not enhanced. Senators Murray, Portman, and Cornyn get it. They recognize that ESOPs help companies share ownership with employees and help provide for a more secure retirement.
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