Government Contractor ESOP Cost Accounting Rules Finalized

Employee Stock Ownership Plans (ESOPs) provide a tax-efficient structure for shareholders to sell some or all of their stock to a trust set up for the benefit of the company’s employees. Shareholders can defer the tax on the sale of their stock to an ESOP, and the company can, in effect, deduct the cost of purchasing the stock (through deductible contributions to the ESOP used to pay down the debt incurred). Moreover, when the company is a government contractor with cost-plus contracts, certain ESOP costs are reimbursable to the extent there is room in the overhead of a contract. As a result, the costs associated with the ESOP can be reimbursed by the government to the company. The issue of which costs are reimbursable however, was both controversial and ambiguous prior to final rules adopted on May 1.

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