The ESOP Tax Advantage Calculator™

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Your Information & Inputs

Estimate the value of 100% of the company. This is not your gross revenue or net sales. Try 3-6 times your company’s EBITDA (earnings before interest, taxes depreciation and amortization), keeping in mind that your actual number might vary if there are special circumstances. If your company’s EBITDA is below $1.5M, your company is likely too small for a leveraged or financed ESOP buyout. A non-leveraged ESOP strategy might work, however.
If your company is a C corporation, the stock basis is the amount you initially paid for your stock. Often it is nominal or even zero if you are the founder. If you don’t know, enter zero. If your company is an S corporation, your basis will be higher. If you don’t know, your accumulated adjustments account (AAA) on your K-1 can serve as an estimate.
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Enter the approximate date on which you would sell your shares to the ESOP.
Please enter a number from 0 to 100.
Enter the percentage of the company to be sold to the ESOP. This is generally anywhere from 30% up to 100%. Sales may be below 30%, but this is the minimum sale percentage required to elect the tax deferred rollover under Internal Revenue Code Section 1042, which allows you to defer taxation on the sale to the ESOP by reinvesting in stocks and bonds of U.S. operating companies.
What percentage will be bank financed? (The model assumes the rest is seller-financed.)
Estimate the company’s “normalized” EBITDA going forward. “Normalized” means adding back or reducing for extraordinary and single-year items of income, loss, or deduction, and adding back any extraordinary compensation. Compensation expense reduces both taxable income and EBITDA and reduces the stock value.
Estimate the company’s annual “normalized” taxable income going forward.
After the transaction, how much will the company’s total payroll for all full time employees (i.e., working over 1,000 hours per year) be?
Please enter a number from 0 to 100.
Estimate the percentage of total annual W-2 payroll paid to the selling shareholder(s) and any of their family members who remain employed after the transaction. For example, if total payroll is $3,000,000 and the owner and their spouse each have W-2 earnings of $300,000, then the family compensation ($600,000) is 20% of total payroll.
Please enter a number from 0 to 100.
If your company is an S corporation, how much cash is distributed by the company to the shareholders each year? This should be entered as a percentage of K-1 income. Some distribute much more, sometimes up to 80%, because the shareholders want more of the profit each year. This can have a dramatic effect on the comparison. If your company is a C corporation, don’t change the default input of 0. The calculator will compare your C corporation to a typical S corporation transaction.

Financing Inputs

Please enter a number from 0 to 100.
The calculator assumes a combined federal and California state individual capital gains tax rate of 33%. Change this for your situation.
Please enter a number from 0 to 100.
Based on your tax return, enter the total tax rate you are paying on federal and any state income taxes combined.
Please enter a number from 0 to 100.
If you company is a C corporation, what rate of tax is the company paying? The calculator assumes that the company is paying taxes and will take advantage of the ESOP incentives. If you are currently using a tax-driven strategy to reduce the tax burden to zero, perhaps with salaries and bonuses, please estimate what the tax rate would be if the company was paying taxes without these strategies. The calculator starts with a combined federal and state tax rate of 33%.

Bank to Company Loan

Please enter a number from 0 to 100.
The purchase of stock can be financed by a bank, by the seller, or a combination of both. The interest rate for bank financing should be lower than seller financing. Perhaps start with your line of credit interest rate.
How long of a term do you expect the loan from the bank to be repaid? Five to seven years is a common term.

Seller Note

Seller financing assumes a higher rate than the bank rate. If the seller will take a note, enter the proposed rate here (for example, 4% above the bank rate).
Over how many years do you want to be repaid?

Your Information

The calculator will use your contact info to show you the results based on the inputs above. By clicking submit, you also agree to receive information from the NCEO intended to help guide you on your path to employee ownership, including new resources, events, publications, webinars, and more. You can unsubscribe at any time.
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Estimate company’s “normalized” taxable income going forward. If you are currently reducing taxable income to close to zero with tax deductions, what would it be if a buyer wasn’t driving the taxable income down? If you don’t have any taxable income, then you won’t get tax benefits from an ESOPs deductions and incentives
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Estimate the company’s projected normalized gross revenue going forward.
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We assume 25% for W-2 eligible payroll.
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Transaction Values

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Bank to Company Loan Amortization

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Seller Note Loan Amortization

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Potential Results of an S Corporation ESOP Transaction

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Potential Results of a C corporation ESOP transaction

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Comparison of Tax Benefits and Costs, C corporation

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Comparison of Tax Benefits and Costs, S corporation

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Compare the Cost to Company of Seller Stock Redemption Without an ESOP

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Disclaimer:

This calculator is for your information only. It is intended to inform you of the tax benefits of an ESOP.  The specifics of your own financial situation and your company’s tax conditions, as well as the specific decisions you make when designing the ESOP transaction and financing, will affect your actual transaction tax benefits. The calculator is not a solicitation or an advertisement for legal services, nor is it a request for legal or tax advice. Your privacy is important, and we respect that. The data you entered will not be retained or used in any manner other than to show you your results.