America’s federal deficit has grown significantly in recent years, accelerated by Coronavirus-related spending in 2020. How to reduce this deficit is one of the early major challenges facing President Biden’s administration. When President Biden announced his tax plan prior to the election, he proposed a number of major tax revisions (discussed in great detail in this GBQ webinar). Now that the Democratic Party has gained control of the Senate, giving it both houses of Congress and the Presidency, the likelihood of tax law changes in the near term has skyrocketed.

For business owners who are interested in selling their businesses or getting some level of liquidity, President Biden’s proposed tax reform should encourage them to consider an underutilized option — selling stock to an Employee Stock Ownership Plan (ESOP).

Why an ESOP Makes Sense Under Proposed Tax Changes

An ESOP is a qualified retirement plan, similar to a 401(k), which rewards employees with ownership of their employer, while at the same time providing an attractive business succession plan for selling shareholders.  These shareholders receive “fair market value” at close or over time for the stock they sell.

There are numerous benefits to selling stock to an ESOP (for the company, seller, shareholders, and employees), both financial and non-financial:

Financial Benefits Non-Financial Benefits
  • Can create income-tax-free company (if 100% ESOP owned)
  • Tax-deductible financing (including principal)
  • Tax savings finances large portion of transaction
  • Stock sale (favorable tax treatment)
  • Potential for tax-free rollover
  • Sellers can participate in ESOP
  • Opportunity for additional return through interest, warrants, SARs


  • Unique ownership transition alternative tool that preserves a company’s legacy
  • Sellers can retain operational control of the business
  • Reward, attract, retain and motivate employees
  • Flexible; can customize ESOP
  • Low “transaction risk”; ESOP transactions almost always close
  • Productivity gains are likely
  • Tax/cash flow savings can facilitate growth


As shown in the table above, many of the financial benefits are tax-related, and in a higher tax environment, these benefits become even more meaningful. Here is how an ESOP’s unique tax benefits help under a few of President Biden’s most important proposed tax changes:

Tax Category Proposed Tax Change Related ESOP Benefit
  • Corporate: rate increases from 21% to 28%, plus an alternative minimum tax (AMT)
  • Individual: top marginal rate increases from 37% to 39.6%
  • Companies can earn income tax deductions equivalent to the sale price
  • Companies can eliminate federal income taxes, as 100% ESOP-owned S-corporations
Capital Gains
  • Long-Term Capital Gains Tax: rate increases from 20% to 39.6% on income above $1 million, matching the top ordinary income tax rate
  • Selling shareholders can defer and potentially eliminate capital gains taxes (by electing an IRS section 1042 rollover)


Many Sellers Will Want to Act Now

Not all sellers are interested in electing an IRS section 1042 rollover and deferring the capital gain on the sale of their stock to an ESOP. Instead, they may prefer to pay the capital gains immediately, before rates (possibly) rise under the Biden administration. In that case, the time to act is now, as any sale of a business (including an ESOP sale) takes months to achieve.

An ESOP as an Alternative to M&A Sale

One of the most common ways shareholders in privately held companies exit their investment is through a traditional merger and acquisition (M&A) sale. However, M&A activity fell drastically during the early months of the pandemic, and even with the arrival of the Coronavirus vaccine and the promise of a return to normalcy, there may be fewer acquirers willing and capable of buying companies.

Because an ESOP transaction is essentially an “internal” sale to employees, there is no need to search for an external buyer. Rather, a trustee will negotiate the sale on behalf of the employees. The lack of an external buyer means the transaction process is often smoother (translation: less disruptive to the business), with a shorter timeline and greater certainty of closure. Lastly, because the employees own the company, it remains independent, and operational control of the company does not need to change.


At the end of the day, there are a number of factors to consider when determining the right succession plan for your company.  To learn whether an ESOP will fit your sale objectives, contact us today, or join us via webinar on February 2nd for an overview on ESOPs.


Article written by:
Joseph Borowski, CFA
Director, Valuation & Financial Opinion Services


Disclaimer: This article has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax advice. You should consult your tax and accounting advisors before engaging in any transaction.

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