New Bill Removes Tax Limits and Small Business Penalties for Employee-Owned Companies

The Promotion and Expansion of Private Employee Ownership Act of 2025 is all about making it easier and more attractive for privately held S corporations to transition ownership to their employees through an Employee Stock Ownership Plan (ESOP). Think of it as a significant federal push to turn more workers into owners, specifically by fixing two major headaches in the current system and setting up new government support.

The Tax Break Gets a Tune-Up

If you’re an owner of an S corporation looking to sell your business to your employees via an ESOP, this bill is sweetening the deal. Under current tax law (specifically Section 1042 of the IRS code), sellers can defer paying capital gains tax on the stock sale, but there are limitations on how this works for S corps. This bill, found in Section 3, simplifies things dramatically by removing a major restriction (subsection (h)) on that tax deferral. Before, this limitation meant the deferral wasn't always a clean deal; now, it’s a much more straightforward benefit, applying to any sales that happen after the Act becomes law. The goal is simple: make selling to an ESOP the most financially sensible exit strategy for business owners, which, in turn, keeps the company intact and the jobs local.

No More Small Business Penalty for Employee Owners

This is perhaps the most practical fix in the entire bill, addressing a weird bureaucratic snag that penalized successful employee ownership. Currently, under the Small Business Act, if an ESOP buys more than 49% of a company, that business can lose its status as a “small business concern,” even if its revenue and employee count haven't changed. Losing that status means losing access to valuable small business loans and programs. Section 5 fixes this. It creates a new rule where, when determining if an ESOP-owned company still counts as a small business, the government must treat the business as if each employee participant directly owns their small slice of the company, rather than treating the ESOP trust as one giant owner. This means the construction firm, the manufacturer, or the software company that transitions to employee ownership can keep its small business benefits, ensuring that the transition doesn't accidentally cut them off from essential capital.

New Offices to Help You Navigate the Buyout

For those who want to explore employee ownership but don't know where to start, the government is stepping in to help. The bill creates two new dedicated federal resources. First, Section 4 requires the Treasury Department to set up the S Corporation Employee Ownership Assistance Office within 90 days. This office will be the technical help desk, providing outreach and hands-on assistance to companies looking to set up ESOPs. Second, Section 6 establishes the Advocate for Employee Ownership within the Department of Labor. This Advocate will act as a centralized liaison, helping resolve disputes between ESOP sponsors and the Department of Labor, and making policy recommendations to encourage more ownership plans. If you're a small business owner considering succession planning, or an employee wondering if an ESOP is right for your company, these new offices are designed to make the process less intimidating and bureaucratic.

The Big Picture: Retirement and Stability

Why does all this matter to the average person? The findings section of the bill points out that millions of Americans lack formal retirement savings, but employees in S corp ESOPs have a solid retirement account built through their ownership stake. By removing tax limitations and small business penalties, this Act aims to increase the number of employee-owned companies, which studies suggest offer more stable jobs and better retirement outcomes for workers. In short, this bill is a behind-the-scenes policy move that could translate directly into more secure jobs and better retirement savings for employees across various industries, from the factory floor to the coding cubicle.