Issue link: https://www.e-digitaleditions.com/i/704526
14 FEDA News & Views running around 50 to 60 percent. The other thing to note here: Fifty-three per- cent of our corporate members employ fewer than a hundred employees. It seems obvious, even if you're a C and you want to take advantage of the tax deferral (1042-S), you have to be a pri- vate company and to be an S you have to be a private company. Most private companies are family-owned and not big employers." The demographics line up with what Curtis and Kottas observed when they, and two other staff members, attend- ed their fi rst Employee Ownership Conference earlier this year. The num- bers, that's what most surprised them. Hosted by NCEO in Minneapolis, the four-day annual event drew more than 1,600 participants—representing all lev- els of experience/interest—and covered a variety of topics, including compensa- tion and benefi ts, legislative and regula- ESOP continued tory updates, employee engagement, and how to effectively manage an employee- owned company. "We were amazed at the size of it and the variety of businesses," says Curtis, who recommends anyone lean- ing toward becoming employee-owned attend the conference. "There were con- struction companies, manufacturing, professional corporations and engineers and well over a thousand employers represented by large corporations down to ones our size and smaller." Of course size is relative. There's no rule of thumb to suggest how large or small a company needs to be to success- fully implement an ESOP "but typically it's based on the number of employees and payroll," says Rodgers. "Maybe a com- pany with fewer than 20 employees can pull it off but that's pretty tough. Most people would agree that it's rare for a company that small to make an ESOP happen. On the fl ip side, if you've got 50 or more, it's very likely that the cost of the transaction will not be a barrier. How much a company can contribute to the ESOP, year after year, is limited by the size of payroll, so the larger the payroll the larger the contributions can be over time." Other considerations are a com- pany's fi nancial health and culture. Environments in which employees feel engaged and already have a sense of ownership tend to fair better, says Rodgers. He also advises bringing in an ESOP professional to gauge a company's fi nancial stability. "Deciding whether or not to do an ESOP is not just about deciding whether or not to do an ESOP," says Rodgers. "It's about doing an ESOP versus the other choices you have. And you can't really make a choice about that until you have someone run the num- bers and make some assumptions about what an ESOP will look like." continued on page 26 Deductibility of employer contributions to the plan Deductibility of dividends Tax benefi ts to owners Taxation of ownership by plan in S corporation Employee taxation ESOPs Deductible up to 25% of eligible compensation. In C corporations, contributions made to pay interest on an ESOP loan generally do not count toward this limit. Dividends are deductible if used to repay an ESOP loan, are passed through to participants, or are voluntarily reinvested in company stock by employees. Seller can defer taxation of gains from a sale to an ESOP in a C corporation that owns at least 30% of company stock after the sale. Allocation of corporate income to the ESOP based on ESOP ownership is not subject to current taxation on the ESOP. Taxed in the same way as other defi ned contribution plans based on distributions from the plan not otherwise rolled over to another qualifi ed plan or an IRA. Profi t Sharing Deductible up to 25% of eligible compensation (profi t sharing plans cannot borrow money from the company or using its credit to buy company stock, so the interest exclusion does not apply). Dividends paid on shares are not deductible. No tax benefi ts to sellers to the plan trust. Plan trusts must pay unrelated business income tax on their attributed corporate income based on ownership. Taxed in the same way as other defi ned contribution plans based on distributions from the plan not otherwise rolled over to another qualifi ed plan or an IRA. Stock Bonus Plans Deductible up to 25% of eligible compensation (profi t sharing plans cannot borrow money from the company or using its credit to buy company stock, so the interest exclusion does not apply). Dividends paid on shares are not deductible. No tax benefi ts to sellers to the plan trust. Plan trusts must pay unrelated business income tax on their attributed corporate income based on ownership. Taxed in the same way as other defi ned contribution plans based on distributions from the plan not otherwise rolled over to another qualifi ed plan or an IRA. Source: The National Center for Employee Ownership Breaking Down The Key Tax Benefi ts