Frequently Asked Questions

Employee Ownership FAQs

Common questions about employee stock ownership plans (ESOPs), employee ownership trusts (EOTs), and other forms of employee ownership, from the basics to technical topics.

This FAQ is written primarily for business owners, managers, and advisors involved in setting up or running an employee ownership plan. If you're an employee at an ESOP company looking to understand your own benefits and rights, see our articles on Working at an ESOP Company and The Rights of ESOP Participants.

NCEO employee ownership FAQ hero (keyboard)

If a seller has some basis in the stock that is sold to an ESOP, can the seller just defer tax on the portion that is gains?

The IRS position is that the portion of a sale eligible for Section 1042 tax deferral treatment is the entire amount of the sale.The seller cannot elect Section 1042 treatment for the portion of the stock being sold that equals the value of the QRP and then expect to be taxed on the remainder based on the difference between the amount received for the remainder of the stock and the seller's basis in that stock as if no 1042 Election had been made.

For more details, see Selling to an ESOP and Financing the Deal and the ESOP Pre-Feasibility Toolkit.

Link to this FAQ Topic: Tax Benefits to the Seller & Company