Expanded Tax Credits for Employee Stock Ownership Plans Available in Colorado and Washington

Employee ownership, and more specifically employee stock ownership plans (ESOPs), continues to garner strong bipartisan support throughout the country. Recently, the state legislatures of Colorado and Washington have enacted laws that expand tax incentives to encourage employee ownership.

Colorado

The Colorado legislature passed HB23-1081, which expands the tax credits offered for implementing various forms of employee ownership. The law was signed by Colorado Governor Jared Polis on May 23, 2023.

Under prior law, qualified businesses were allowed a tax credit in the amount of 50% of the costs to convert the qualified business to a form of employee ownership. The tax credit was capped at $25,000 for converting a qualified business to a worker-owned cooperative or employee ownership trust (EOT) and capped at $100,000 for converting a qualified business to an ESOP.

The new law makes new methods that businesses are using to transfer equity to employees eligible for the credit — the first time alternative equity structures are codified in a statute in relation to employee ownership, at the state or federal level. These new methods include LLC membership, phantom stock, profit interest, profit sharing, restricted stock, stock appreciation right, stock option, and synthetic equity.

The law also increases the caps on tax credits from $100,000 to $150,000 for ESOPs, and from $25,000 to $40,000 for EOTs and worker cooperatives. It also establishes a $25,000 cap for alternative equity structures.

The law makes partially employee-owned businesses eligible for the credit to help cover the costs associated with expanding employee ownership (any 20% increase in employee ownership is eligible, with a maximum of one application per year).

Washington

The Washington state legislature passed S.B. 5096, a state-wide initiative aimed at expanding employee ownership. The bill establishes a feasibility assessment and implementation tax credit for ESOPs, worker coops, and EOTs of up to 50% of the first $100,000 for ESOPs and $25,000 for worker coops and EOTs. The total amount of credits available is capped at $2 million per year.

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