Jump to content

ESOP Cost basis after S Election


Guest erisaauditor

Recommended Posts

Guest erisaauditor

ESOP Cost basis after S Election

What happens to the ESOP cost basis of shares owned after an S election?

As a C corporation the distributions reported on 1099-R showed an ordinary income amount for the cost basis amount and a capital gain on the appreciated value.

If the S election changes ESOP distributions to "cash only" distributions do the old long-term employees with much appreciation lose the capital gain treatment of their holdings? With the S election are they now required to categorize their distributions as ordinary income? Or do we still need to track the cost basis of their shares as an S corp owned ESOP?

Thank You in advance,

TW

Link to comment
Share on other sites

For starters, from my limited experience in this, distributions paid in cash from the ESOP will be ordinary income.

If a lump sum distribution paid to a participant from the ESOP includes shares of company stock (even if the shares are immediately bought back for cash by the company or the plan), then the participant has some NUA (=current value of the stock less basis).

I'd recommend that you continue to track basis in the ESOP, or at least keep the records you would need if you had to go back and figure it out. And beginning with the time the company became an S corporation, think of the ESOP as a shareholder of the S corporation. Earnings that pass thru to shareholders also pass thru to the ESOP and add to the basis of the stock in each participant's account. And the basis per account changes with the allocation of stock that the ESOP acquires and allocated forfeitures.

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
×
×
  • Create New...