Employee Ownership Boost: Bill Offers Full Tax Deferral for S-Corp ESOP Sales, Adds New Support Systems

The "Promotion and Expansion of Private Employee Ownership Act of 2025" is on the table, and it's looking to make a big splash in how employees can own a piece of the S corporations they work for. For context, an Employee Stock Ownership Plan (ESOP) is a type of retirement plan that lets employees own shares in their company, and an S corporation is a business structure that passes income directly to shareholders for tax purposes. This bill rolls out a significant tax incentive: a full deferral of capital gains tax for business owners who sell their S corporation stock to an ESOP, kicking in as soon as the bill becomes law. Alongside this tax break, the legislation plans to set up dedicated support structures – a new office in the Treasury Department for hands-on assistance and an official Advocate for Employee Ownership within the Department of Labor – all while making it easier for ESOP-owned companies to keep their valuable small business status for Small Business Administration (SBA) programs.

More Green for You, More Green for Them: Tax Breaks and Business Perks

One of the biggest game-changers in this bill, outlined in Section 3, is how it handles taxes for S corporation owners selling to their employees. Currently, if you own an S corp and sell to an ESOP, a rule in Section 1042(h) of the Internal Revenue Code (as recently tweaked by the SECURE 2.0 Act) means you can only defer federal capital gains taxes on 10% of your profits from that sale. This new Act proposes to completely repeal that 10% cap. If this passes, S corp owners could potentially defer taxes on 100% of the gains when selling to an ESOP, effective as soon as the bill is enacted. This aligns the tax treatment more closely with C corporation sales to ESOPs and could make employee buyouts a much more financially attractive option for S-corp owners.

But what about the company itself after it becomes employee-owned? Section 5 tackles a common headache: losing 'small business' status. Typically, if an ESOP buys more than 49% of a small business, that business might no longer qualify for SBA loans or other programs. This bill amends the Small Business Act, starting January 1st of the year after it passes. Under the new rules, an 'ESOP business concern' – basically, a company that was small before the ESOP bought a majority stake – will have its size calculated by treating each employee in the ESOP as if they own their shares directly. So, if you work at a local manufacturing S-corp that becomes employee-owned, this provision could help the company keep its SBA perks for future growth, even if the ESOP owns most of the stock.

Your ESOP Support Crew: New Government Help Desks

So, you're interested in an ESOP, but it sounds complicated, right? This bill tries to address that by creating some new support systems. First up, Section 4 directs the Treasury Department to launch an 'S Corporation Employee Ownership Assistance Office' within 90 days of the bill's enactment. Think of this office as a dedicated helpline and resource center for S corporations. They'll be tasked with educating companies and individuals about the benefits of employee ownership and providing technical, step-by-step assistance to S-corps looking to set up ESOPs.

Then, over at the Department of Labor, Section 6 of the bill amends the Employee Retirement Income Security Act of 1974 (ERISA) to establish an 'Advocate for Employee Ownership.' This Advocate will wear a few hats: acting as a go-between for the Labor Department and employee-owned businesses, offering public education, helping out with ESOP-related disputes, and even recommending new laws or rules to promote employee ownership. The Secretary of Labor will also need to get the Advocate's input when creating ESOP regulations. This role, compensated at Level V of the Executive Schedule (a standard for certain government positions), will also mean an annual report to Congress on how employee ownership is progressing. So, if you're an employee at a company considering an ESOP, or part of an existing one, these new offices are designed to provide more clarity and support.

The Bottom Line: What This Means for Your Wallet and Workplace

Why all this focus on employee ownership? The bill itself, in Section 2, points to some pretty compelling reasons. It notes that S corporation ESOPs have already helped millions of Americans build ownership stakes, leading to potentially beefier retirement accounts and more job security compared to similar companies. The overarching goal here is to grow those numbers.

For someone working at an S corporation, this could mean a clearer path to becoming an owner, sharing in the company's profits, and building wealth for retirement. If your boss is thinking about selling the business, this Act might make selling to the employees a more financially viable option for them, keeping the business locally rooted and potentially preserving jobs. It’s about making employee ownership less of a niche concept and more of a mainstream option for businesses, building on previous efforts like the SECURE 2.0 Act of 2022, which this bill directly updates, and long-standing frameworks like ERISA and the Small Business Act.