Brief History of ESOPs
Congress wanted to incentivize owners to sell or partially sell their company to their employees. In order to make this more interesting for companies, Congress created financial incentives for owners. (Watch 1 minute Video)
The TAX INCENTIVES they came up with were substantial.
The 1974 ERISA Act codified and established the legal framework for the ESOP. This law allowed the ESOP to borrow money using the company’s balance sheet. And if structured properly, instead of paying tax to the IRS, this money could be used to buyout the owner.
The 1986 Tax Reform Act allows 100% tax deferral on the gain to an owner that sells to an ESOP. The Tax Reform Act also allows C corporations to deduct dividends, making ESOP’s especially tax-advantaged.
The 1997 Taxpayer Relief Act allows an ESOP to be an S corporation, ushering in a completely tax-free company.
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