Blue Ridge ESOP Associates Industry News

To know how to adjust S Corporation stock basis, we first need to answer the question: What is stock basis? Stock basis is the amount of original value or cost of the shares, which is needed for tax purposes. For S Corporations, though, stock basis becomes a moving target because it goes beyond just the original cost of the shares. Stock basis for S Corporations also considers annual fluctuations in income or loss, and deductions.

It is common for an ESOP to be established with a leveraged stock purchase from the selling shareholder(s).  When a leveraged ESOP is established, the shares acquired initially are not allocated to participants. Those shares initially sit in a suspense account.  Then as the company makes contributions to the ESOP, the ESOP uses those contributions to make a payment on the loan between the company and the ESOP. When that occurs, a portion of the shares in the suspense account are released and allocated to eligible participants’ accounts based on the provisions in your plan document. 

A Summary Plan Description (SPD), is a shortened version of the full Plan Document, written in a way to be easily understood by the average participant. It explains all the specific information on who is eligible to be a participant, when they can enter the plan, and how they will get contributions into their ESOP account. Additionally, it addresses the number one question participants usually have, which is how and when they can start receiving their benefits from the ESOP. Other items usually disclosed in the SPD are basic information about the plan sponsor, and action steps for questions or complaints about the ESOP.