Impact of New Tax Laws on Mid-Sized Businesses with ESOPs

New Tax Laws and ESOPs

By Regina Carls

Companies with Employee Stock Ownership Plans (ESOP) can expect to see changes in 2013 with two new pieces of tax legislation. In general, the passage of the American Tax Relief Act of 2012 (ATRA) increases marginal tax rates, while the Net Investment Income Tax (NIIT) included in the Patient Protection and Affordable Care Act (PPACA or “ObamaCare”) will begin to be levied on net investment income.

Regina Carls, Managing Director of Chase’s ESOP Advisory Group, analyzes how these two pieces of legislation will affect mid-sized businesses with Employee Stock Ownership Plans (ESOPs) and the highlights of the full article are summarized below.

Impact to ESOP-Owned Companies

C Corporations: There is little or no impact from ATRA to C corporations. C corporation income tax rates remained unchanged under ATRA.

Partially ESOP-owned S Corporations: The impact may be material since the law acts as a tax rate increase on business income for many, if not most, S corporations. Refer to the article for further details.

100% ESOP-owned S Corporations: These ESOPs are not impacted by the rate changes in ATRA given that there is likely no tax liability since the ESOP owns all the common stock and is tax exempt.

Impact to Selling Shareholders

C Corporation selling shareholders will likely have to pay the NIIT as well as the higher capital gains tax rates on capital gains arising from the sale of their shares or the liquidation of the company through an asset sale.

S Corporation shareholders will likely have to pay the higher capital gains taxes arising from a sale of their stock. Active shareholders are spared the NIIT while passive shareholders will have to pay the NIIT on their gain from a sale transaction.

For more details on what these new rates mean for your business as well as the impact to selling shareholders, read the full article.

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Meet the Author

Photo: Regina Carls, Senior Vice President, ESOP Advisory Group

Regina Carls
Managing Director
ESOP Advisory Group

Regina Carls is Managing Director of Chase’s national ESOP Advisory Group. She is dedicated to helping bankers and their privately held clients evaluate the benefits of selling stock to an ESOP and therefore creating liquidity for the owners in the transaction. She has been with Chase for more than 20 years.

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