As indicated by the following chart, a company can reduce its corporate income taxes and increase its cash flow and net worth by simply issuing treasury stock or newly issued stock to an ESOP in any amount up to 15% of eligible annual payroll. Using this approach, a company may substantially reduce or even eliminate its corporate tax liability. The cash flow impact can be dramatic. If the contribution to the ESOP is made in lieu of cash contributions to a profit sharing plan, the cash flow savings are even more dramatic. Of course, the owners must consider that these contributions of stock will result in some dilution of their ownership interest.

How an ESOP May Be Used

to Increase Cash Flow

ASSUMPTIONS

Qualified payroll = $2,000,000

Pretax earnings = $500,000

Profit Sharing Contributions = $300,000 cash

ESOP Contributions = $300,000 of newly issued company stock

COMPUTATION - ONE YEAR ONLY

	No Plan	Profit Sharing	With ESOP
Pretax earnings	$500,000	$500,000	$500,000
Contribution (15% x $2,000,000)	-0-	300,000	300,000
Adjusted pretax earnings	500,000	200,000	200,000
Federal & state taxes (44%)	220,000	88,000	88,000
After tax earnings	280,000	112,000	112,000
Add back non-cash contribution	-0-	-0-	300,000
Cash flow & net worth increase	$280,000	$112,000	$412,000

An ESOP can also be used to generate cash flow savings if the company is contemplating a stock redemption. Stock redemptions are non-deductible. By using an ESOP instead, the stock repurchase can be made with deductible dollars. Moreover, as shown by the following chart, if the ESOP replaces a profit sharing plan, the cash contributions that would have been made to the profit sharing plan can be made to the ESOP instead, thereby enabling the plan to purchase the stock without any additional cash flow expense to the company whatsoever.

A Stock Redemption May Be

Several Times as Costly

as an ESOP Purchase

ASSUMPTIONS

Profit sharing contributions - $100,000 cash - invested in stock market

ESOP contributions - $100,000 cash - used to purchase company stock

Stock redemption - $100,000 per year

COMPUTATION - ONE YEAR ONLY

	No Plan	Profit Sharing	With ESOP
Pretax earnings	$300,000	$300,000	$300,000
Contribution	-0-	100,000	100,000
Adjusted pretax earnings	300,000	200,000	200,000
Federal & state taxes (44%)	132,000	88,000	88,000
After tax earnings	168,000	112,000	112,000
Stock Redemption	100,000	100,000	-0-
Cash flow & net worth increase	$ 68,000	$ 12,000	$ 112,000

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