Tax Rates, Strategic Premiums, and the Cost-Benefit of Selling to an ESOP

Tax Rates, Strategic Premiums, and the Cost-Benefit of Selling to an ESOP by Chris E. Best an ESOP Advisor.

A question we are often asked by business owners in the exit planning process is similar to the following:

“Would it be more financially beneficial for me to sell my shares to a strategic buyer or to sell my shares to an employee stock ownership plan and elect tax deferral under Section 1042?”

Since the reduction of the capital gains taxes in the late 1990s, the answer to the question for most business owners is that they would realize more after-tax cash proceeds if they sold their shares to a strategic buyer. However, with the recent increase in the long-term capital gain tax rate and the additional Medicare surcharge, the answer to the above question has changed dramatically.

The decision regarding which one is more financially beneficial depends on a number of factors including the following:...

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