Stock ownership plan can yield tax benefits to practice

Practice Pointers. By Cathy B. Goldsticker, AMNews contributor. Dec. 15, 2003.

PRACTICE POINTERS

Answers to questions about the business side of your practice

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Question: We are a five-doctor group interested in an employee stock ownership plan to assist with retiring one physician's stock holdings in the practice. How might this benefit our group, and does it matter whether we are a C or S corporation?

Answer: An ESOP falls under the retirement plan category as a qualified-contribution plan designed to invest primarily in employer securities and consequently provide employees with an ownership interest. The discrimination, vesting and participation rules that apply to more traditional retirement plans apply to ESOPs.

There are substantial income tax benefits for you to maintain an ESOP, and it can solve your ownership succession problem as well. The ESOP can borrow funds to purchase your doctor's shares, and the interest and principal can be paid by the practice. If your practice is a C corporation, the principal and interest can be a tax deduction, which allows the debt service to be repaid with pretax dollars. As an S corporation, only the interest payments are eligible for a tax deduction.

Another tax benefit allows the seller to postpone gain recognition if qualified replacement property such as stock or debenture bonds are purchased. But this benefit applies only if your practice is a C corporation.