S corporations and C corporations have a time-sensitive opportunity to implement an employee stock ownership plan (ESOP) effective for the 2024 tax year—even though 2024 has already ended. By acting before the upcoming fall deadlines, companies can make an ESOP contribution and claim a corresponding tax deduction for the 2024 tax year.
Historically, many companies were pressed to close transactions by year-end to take advantage of tax deductions and provide a more immediate benefit to employees. However, due to changes in tax law, companies now have more flexibility to close at any time throughout the year, without sacrificing these tax benefits or the ability to provide an incentive to employees retroactively. Read more about the Fallacy of the December 31 Close.
Key Deadlines
- S corporations: September 15, 2025 (extended filing deadline for calendar-year S corporations)
- C corporations: October 15, 2025 (extended filing deadline for calendar-year C corporations)
Note: If your company has a non-calendar year tax year, the above extended tax-filing deadlines should be adjusted.
How It Works
Under Section 201 of the SECURE Act, an employer may establish a new defined contribution plan, including an ESOP, after the end of the taxable year, but before the employer’s tax filing date, including extensions, and treat the plan as having been established on the last day of the taxable year. Under Internal Revenue Code Section 404(a)(6), these plans may be funded by employer contributions up to the employer’s tax filing date, including extensions, to be on account of and deductible for the prior taxable year.
To effectively utilize this strategy, a corporation must have first secured an extension for its 2024 tax return. With guidance from a qualified ESOP advisor, the corporation can adopt and execute the ESOP plan documents by the applicable extended tax return due date. Properly drafted plan documents can designate the ESOP as effective retroactively to January 1, 2024, enabling the company to make a contribution to employee accounts for the prior year. The ESOP trust must be funded with a deductible employer contribution before the 2024 tax return is filed.
If structured properly, this deductible contribution can be cash neutral for the company or utilized as a down payment for a selling shareholder in a transaction.
Benefits
- Tax Deduction: Contributions to the ESOP are deductible in 2024 if made by the extended return due date, saving true tax dollars for the company and/or shareholders.
- Employee Benefit: An ESOP helps recruit and retain talent by providing employee ownership. A retroactive, cash-neutral contribution can be a cost-effective way to provide a benefit with a reduced cash flow impact.
- Succession and Liquidity Tool: An ESOP can also be part of a broader business succession or shareholder liquidity strategy.
Action Items
- Confirm that the 2024 tax return is on extension.
- Engage with an experienced ESOP advisor.
- Execute plan documents and fund the ESOP trust before the applicable deadline.
Please visit BDO’s Global Employer Services page to stay up to see how we can help.