Seven States Tax ESOP S Earnings as Individual Income

The District of Columbia, Louisiana, Michigan, New Hampshire, New Jersey, New York (and New York City), and Tennessee do not provide the same exemption from income tax for S corporation earnings attributable to an ESOP as does federal tax law. In addition, 23 states impose some kind of tax other than income tax on S corporations, including ESOPs. Alabama, California, Connecticut, Hawaii (financial corporations only), Illinois, Iowa (financial corporations only), Kansas (banks and S&L's only), Kentucky, Maine (financial corporations only), Massachusetts, Minnesota, Mississippi, Missouri, Nebraska (certain financial institutions only), New Hampshire, New Mexico, North Carolina, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Vermont, and West Virginia all have some kind of franchise, corporate income, excise, or entity tax. These taxes may be fairly nominal in some states. An article from Morgan, Lewis, and Bockius providing more detail on these taxes will be published in a chapter in a forthcoming issue of the NCEO's Journal of Employee Ownership Law and Finance and the third edition of the NCEO's book S Corporation ESOPs.