ESOPs: A Solution for Business Owners Teetering on the Fiscal Cliff

It has been estimated that business owners have up to 80 percent of their personal net worth tied up in the value of their business, so the pending tax increases have many owners worried about a significant loss of assets to higher capital gains taxes.

One solution to consider is an employee stock ownership plan (ESOP), a qualified retirement plan whose assets are made up of company stock that is held in a tax-exempt trust.  The benefit to business owners is that an ESOP allows you to retain control of the business while allowing you to sell stock and diversify your assets in a tax-advantaged way.

In order to avoid capital gains tax on ESOP stock, the ESOP must own at least 30 percent of the company’s common stock and meet other IRS tax code requirements.  An additional benefit is that the ESOP provides employees with retirement benefits as well.

Even if Congress puts a Band-Aid on the impending tax changes before the end of the year, most experts agree that the capital gains tax will increase.  In addition, there is a new 3.8 percent tax on capital gains for higher income individuals that will kick in Jan. 1, 2013, thanks to the health care reform act.

Beyond federal taxes, some states have high capital gains tax rates that make an ESOP attractive to business owners who operate in those states.  The top 10 states with the highest capital gains taxes include Hawaii, California, Oregon, Vermont, Washington, DC, New Jersey, New York, Maine, Minnesota and Iowa.

If you’re a small or mid-size business owner, call us today at 212-671-1973 to schedule your comprehensive LIFT™ (legal, insurance, financial and tax) Foundation Audit.  Normally, this session is $1,250, but if you mention this article and we still have room on our calendar this month, we will waive that fee.

About Priscilya M. Hawkes, Esq.

Hawkes Law Group P.C. serves business owner creative-types with "larger-than-life" dreams.
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