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pre-transaction in order for the selling shareholders to utilize the Section 1042 deferral. However, there are certain restrictions governing the time periods for converting back to an S-corp. Depending on the transactional structure, a selling shareholder may participate in the ESOP and/or receive synthetic equity to further enhance the return to a selling shareholder. It is important to surround your engineering firms with banking partners who are experts in your industry, and understand the day-to-day challenges business owners face. Wintrust is among a few commercial banks that, on a national basis, brings a dedicated team of professionals to provide financing to both the ESOP and AEC space. Consequently, we remain enthused about bringing ideas and much needed education to a business transition alternative that has long been misunderstood. We look forward to meeting you in Dallas in September. JAMES SWABOWSKI is senior vice president; PAT STOLTZ is managing director; and MATT DOUCET is managing director in the commercial banking group at Wintrust Financial Corporation. They can be reached at jswabowski@wintrust.com; pstoltz@wintrust.com; and mdoucet@ wintrust.com. “ESOP ownership offers significant tax advantages to both the selling shareholders as well as the surviving company. These tax advantages should be well understood before a shareholder commits to a preferred sale path.”

SWABOWSKI, STOLTZ, & DOUCET, from page 11

Finally, ESOP ownership offers significant tax advantages to both the selling shareholders as well as the surviving company. These tax advantages should be well understood before a shareholder commits to a preferred sale path. ESOPs can only take the form of a C-corp or an S-corp. Because in its simplest form an ESOP is a qualified benefit plan, the contributions it makes to the trust, established to house the employees, are tax deductible, thereby reducing taxable income. A further benefit in a C-corp scenario is offered to the selling shareholders. In the case where at least 30 percent of the company is sold to the ESOP, the selling shareholders have the ability to elect a tax deferral of the capital gains of the transaction. In the case of an S-corp ESOP – assuming a 100 percent sale – the surviving S-corp ESOP is a federal tax exempt entity, and therefore is not subject to federal taxation. In this scenario, the selling shareholders are not eligible for the election of tax deferral under Section 1042 of the Internal Revenue Code. It is important to note that an S-corp has the ability to convert to a C-corp “It is important to surround your engineering firms with banking partners who are experts in your industry, and understand the day-to-day challenges business owners face.”

THE ZWEIG LETTER August 20, 2018, ISSUE 1261

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