ESOP Dividend Deductions

C corporations can deduct dividends when those dividends are paid on stock that was acquired by the ESOP with stock acquisition debt and are used to (a) pay down that debt, (b) passed through the ESOP to its participants, or (c) designated by them to be used to buy more company stock for their ESOP account.  This is the only instance within our tax system where dividends can be deducted.  Unfortunately, however, the IRS has ruled that these deductible dividends are subject to the Alternative Minimum Tax, and, despite the obvious fact that this was not contemplated by Congress when it enacted this provision, courts have upheld the IRS on this.  Accordingly, unless the AMT is changed (as it may be), the benefit of this deduction will be reduced to only around 14% (i.e., the difference between the 34% tax rate on corporate ordinary income and the 20% Alternative Minimum Tax rate).

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