For business owners considering an Employee Stock Ownership Plan (ESOP), timing is everything—especially when it comes to securing the 2024 pre-close contribution deduction. With September 15 on the horizon, taking action now can unlock significant tax benefits and help you maximize valuable deductions.
What the Legislation Says
Under I.R.C. § 401(b)(2):
If an employer adopts a stock bonus, pension, profit-sharing, or annuity plan after the close of a taxable year but before the time prescribed by law for filing the return of the employer for the taxable year (including extensions thereof), the employer may elect to treat the plan as having been adopted as of the last day of the taxable year.
This means that businesses establishing an ESOP today can still make a deductible contribution for the prior tax year as long as the plan is adopted before the extended tax deadline—September 15, 2025.
Why This Matters for Business Owners
Companies looking to sell to an ESOP can make a contribution before their 2025 income tax filing (including extensions) for the 2024 tax year under the following conditions:
- The ESOP and trust are established before the contribution and extension filing.
- A qualified contribution is made to the ESOP trust.
Clients who have used this strategy have saved a significant amount on income taxes—often on taxes already paid through estimated payments by the company or shareholders for the 2024 tax year.
Key Actions to Take Now
Whether you’re considering an ESOP or have already begun the transition to employee ownership, now is the time to evaluate your timeline and ensure you’re positioned to take full advantage of available tax benefits.
To realize the benefit from the 2024 pre-close contribution deduction:
- extend your tax return
- ensure the ESOP transaction is on track to close by September 15, 2025
Contact Lazear
No matter where you are on your ownership transition journey, taking proactive steps now will help ensure a smooth transition while maximizing the financial and strategic benefits.
To discuss this information in more detail, contact a member of our team.
