This bill modifies the tax rules for private foundations by exempting certain employee-owned stock from being counted as excess business holdings, under certain conditions, to encourage employee ownership.
W. Steube
Representative
FL-17
The "Reduction of Excess Business Holding Accrual Act" modifies the rules for calculating a private foundation's excess business holdings. It excludes certain employee-owned stock from being counted towards the limit, specifically stock bought from an ESOP after 2020 that is not publicly traded and is held as treasury stock. This adjustment aims to encourage employee ownership without penalizing private foundations. It applies to taxable years ending after the law's enactment and to stock purchases in taxable years starting after December 31, 2019.
New Bill Adjusts Foundation Tax Rules for Stock Repurchased from Employee Ownership Plans
This bill, the "Reduction of Excess Business Holding Accrual Act," tweaks a specific tax rule affecting private foundations and companies with Employee Stock Ownership Plans (ESOPs). It changes how certain stock, bought back by a company from its own ESOP after January 1, 2020, is counted when calculating a foundation's potential tax liability for holding too much of a business.
Decoding the Details: ESOPs and Foundation Taxes
Let's break that down. Private foundations generally face taxes if they hold too much stock in a single business – these are called "excess business holdings" rules, designed to keep foundations focused on charity, not controlling companies. An ESOP is a type of employee benefit plan that gives workers ownership interest in the company. This bill focuses on situations where a company buys back its own stock from its ESOP. Under Section 2, if that repurchased stock isn't easily traded publicly and the company holds it (as treasury stock, cancels, or retires it), it gets special treatment for the foundation's tax calculation. Specifically, it's generally treated as if it's still outstanding stock, unless doing so would push the foundation's ownership stake above 49%. This complex rule seems aimed at preventing the mere act of a company buying back ESOP shares from automatically triggering tax issues for a foundation shareholder by drastically changing ownership percentages on paper.
The Fine Print: Who Qualifies and When?
There's a key condition: this special treatment only applies if the stock was purchased from an ESOP that has been around for at least 10 years. This suggests the rule targets established employee ownership structures, perhaps to avoid incentivizing the creation of new ESOPs purely for short-term tax maneuvering. The changes apply retroactively to stock purchases made in tax years starting after December 31, 2019, affecting foundation tax calculations for years ending after the bill becomes law.
Real-World Ripples: What This Could Mean
So, what's the practical effect? For companies with mature ESOPs and foundation investors, this could provide more flexibility in managing their stock and ownership structure without inadvertently causing tax headaches for their foundation shareholders. For foundations holding stock in such companies, it could potentially lower their risk of facing the excess business holdings tax, freeing up resources. While it supports established ESOPs indirectly, the 10-year rule limits its scope. It's a technical adjustment, not a seismic shift, but one that requires careful attention from companies managing ESOP buybacks and the foundations invested alongside them.