ESOP tax deduction for leveraged plan

[Guest DAVID STOVALL]

We have a leveraged ESOP where the original bank debt and ESOP debt are the same. Both have variable interest rates and different payment terms. What would be the tax deduction, based on the following facts:

Bank loan:

principle payments - 750,000

interest payments- 365,000

ESOP loan (15 yr loan):

principle payments - 126,000

interest payments - 390,000

Compensation expense (based on P&I method of amortization for calculation of release of shares):

FMV basis of shares released - 250,000

cost basis of shares released - 270,000

-David

[RLL]

Hi David Stovall ---

If the employer contributes $516,000 which the ESOP uses in a timely manner to pay the principal and interest due on the ESOP loan, the $516,000 will be deductible under IRC section 404(a)(9)....if the covered payroll is at least $504,000, if the employer is not an S corporation, and if there is no violation of section 415.

In addition, the $365,000 in interest paid by the employer to the bank will be deductible as a payment of interest....[but not under section 404(a)(9)]....and the $390,000 of interest paid by the ESOP will be taxable to the employer as interest income.