Tax reform's ripple effects on ESOPs

BVWireIssue #184-1
January 10, 2018

The new tax law leaves ESOP legislation unaffected, but it will have some indirect effects, some of which could be significant, according to the National Center for Employee Ownership (NCEO). For example, the corporate tax cut is expected to increase corporate after-tax profits, which will increase the appraised value of ESOP stock. This in turn will increase the size of repurchase obligations. For C corps, this shouldn’t be a problem since theoretically they will have more cash on hand to cover the repurchase obligation. “This change will also affect 100% ESOP-owned S corporations because their shares are appraised as if they were C corporation shares,” says the NCEO. “Unlike C corporations, however, S corporations will not be generating any more cash than they had been before tax reform, so they will be facing a larger repurchase obligation without a corresponding increase in cash available.” Read more about tax reform’s effects on ESOPs here.
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