Pub. 1 2019 Issue 4

25 nebraska society of cpas W W W . N E S C P A . O R G your employees keep their jobs, and your organization stays in the community where it is located. The ESOP can also act as a corporate financing vehicle to refinance existing debt, facilitate acquisition or divestiture strategies, and provide incentives for productivity and increased cash f low. A 100 percent ESOP- owned S corporation can eliminate federal income tax at both the corporate and shareholder levels. If you sell 30 percent or more of your individual stock in a C corporation to an ESOP, you can defer recognition of the gain on the sale by buying domestic stocks and bonds as replacement property under Code Section 1042. An ESOP also provides estate planning and charitable giving opportunities. As with other tax-qualified plans, ESOPs enjoy the tax benefits of contributions being made on a pre-tax basis and growing tax-deferred inside the ESOP while allowing distributions to be rolled to an IRA with no tax consequences. ESOPs also have some unique rules. For example, ESOPs of closely held companies must be valued once a year by an independent, third-party appraisal, offer a put option to buy back company stock distributed from the ESOP, and provide diversification rights to older participants as they near retirement. New Nebraska Law Under a new Nebraska law, which becomes effective in September 2019, a CPA firm may be owned by an ESOP. The Nebraska Public Accountancy Act is being amended to allow CPA firms and public accounting firms to be owned by natural persons, a partnership or limited liability company, a corporation, or an ESOP. I was the principal designer and drafter of the new law that allows CPA firms to be owned by an ESOP and have helped draft updated regulations. The bill was proposed in January by State Senator John Stinner of Gering and was approved by the Legislature and signed into law by Governor Pete Ricketts on March 5, 2019. Now, CPA firms, like architectural and engineering firms, can sponsor an ESOP and can enjoy the special tax benefits associated only with ESOPs. Law firms and medical practice firms are still not allowed to be owned by an ESOP or anyone other than a licensed professional in their respective professional services area. The Nebraska Board of Public Accountancy is in the process of publishing updated regulations to coordinate the regulations with the new law that allows ESOP ownership of CPA firms. With the amendment of the Public Accountancy Act, ESOPs are being added to the list of permissible owners of CPA and public accounting firms. CPA Firm Ownership by Non-Licensed Employees Historically, persons who were non-licensed employees of a CPA firm could be owners of the CPA firm as long as all non- licensed CPA owners did not total more than 49 percent of the total number of owners, did not own more than 49 percent of the stock or voting rights, or receive more than 49 percent of the profits or losses of the firm. Going forward, the ownership of a CPA firm will also need to meet the same requirements under the Nebraska Public Accountancy Act relating to non- licensed employee owners of the CPA firm. Under the new law, an ESOP can own 100 percent of a CPA firm in Nebraska. With ESOP ownership, the trustee of the ESOP is the legal owner of the ESOP stock, but a CPA firm with an ESOP will need to look through the ESOP to the beneficial ownership of the participants. This means that the 49 percent ownership limitations must bemet in total ownership interests of the CPA firm. Any non-CPA ownership interest inside the ESOP would be aggregated with any stock ownership outside of the ESOP and must stay under the 49 percent thresholds. Collectively, the non-licensed employees could not own more than 49 percent of the stock held both inside the ESOP and outside the ESOP. This is something that needs to bemonitored annually. Licensed CPAs, who directly own individual shares of stock of a CPA firm and indirectly own any shares under the ESOP, may own up to 100 percent of a CPA firm. However, if the firm has non-licensed full-time employees and wants to establish an ESOP, the ESOP rules require broad participation by employees of the sponsoring company. If a CPA firm sponsors an ESOP going forward in Nebraska, the firm will have to meet the broad participation rules under the Code and ERISA by allowing both licensed CPAs and non-licensed employees to participate in the ESOP and meet the 49 percent ownership rules for non-licensed employees under Nebraska law. Tr ustees of ESOP for CPA Firm Under the new Nebraska law, if the ESOP trustees are natural persons, the trustees of the ESOP may only be licensed certified public accountants. However, in the event of a conflict of interest stock transaction, such as when the ESOP would buy shares of stock from an owner of the firm, the CPA trustees could not act on behalf of the ESOP because of a conflict of interest. In that situation, the firm may engage an independent third-party trustee to act on behalf of the ESOP for the stock transaction. Summing It Up Good news for Joe and Pete and CPA firms in Nebraska! With the passage of this new law, individual shareholders can sell their shares of stock in a CPA firm to an ESOP at fair market value. The new law allows CPA shareholders to establish a business succession plan to transition the ownership of the firm on a tax-advantaged basis. The ESOP provides an exit strategy for retiring CPAs. In a sale to an ESOP, a CPA firm becomes more sustainable, the employees maintain their jobs through an ownership transition, and the firm stays in the community where it was founded. This type of transition is a win-win situation for the selling shareholders, the ongoing active employees, the firm itself, and the community in which the firm has been established. We think this is a great opportunity for CPA firms in the state of Nebraska. This law provides CPA firms with an additional option for business succession planning. It presents an exciting opportunity for retiring shareholders to receive fair market value for their investment in the firm, for active employees to become owners of the firm and have a retirement savings plan for their own retirement, and for the community to hold on to an employer contributing to the growth and well-being of the community. Please let us know if you have any questions or would like more detailed information regarding ESOP ownership. t For more information, contact Joan Cannon at McGrath North at jcannon@mcgrathnorth.com . She has been practicing law since 1981. Cannon is passionate about helping clients solve their employee benefits problems, representing employers and fiduciaries in both the private and public sectors. When it comes to ESOP stock transactions, business succession, and executive compensation, she has the strategy and know-how to achieve the client’s goals. Read more at www.mcgrathnorth.com/attorneys/ joan-m-cannon-esop-attorney.