According to the ESOP (Employee Sock Ownership Plans) Association, there are approximately 10,000 ESOPs in place in the U.S., covering 10.3 million employees - 10% of the private sector workforce - with asset values approaching $1 trillion.
Doug Dell, senior vice president and commercial banking manager at KeyBank, talks about the nuances of capital equipment financing for ESOPs in this article published by ColoradoBiz Magazine.For closely-held companys, ESOPs provide a great transition plan for business owners who are moving into retirement, and there are significant tax advantages afforded the ESOP structure that provides the ESOP company additional cash flow to finance the purchase of its stock. In fact, a 100% ESOP owned S-Corporation is essentially a tax-free entity.
For an existing ESOP company that enjoys those tax benefits, the decision on how to finance on-going capital expenditures, including equipment purchases, should be considered carefully. Factors to take into consideration include cash flow, the risk of equipment obsolescence, and the impact of equipment depreciation.
To optimize tax benefits, ESOPs increasingly turn to equipment leasing as an alternative financial planning strategy. In fact, some leases offer benefits that are especially well suited to ESOPs.
For example, a tax lease shifts tax ownership from the user to a qualified lessor. The lessor can then use the tax benefits of equipment ownership efficiently, allowing them to offer lower lease payments. The ESOP effectively trades its unusable tax depreciation for those lower payments from the lessor.
In addition, leasing gives an ESOP the option to purchase equipment at the end of the lease or return the equipment if it no longer fits the company’s business needs.