WorldWide Drilling Resource

Drilling Into Money Not Boring by Mark E. Battersby ESOP Benefits Far Exceed Good-Bye In addition to being an excellent exit strategy with significant tax savings for drilling business owners, Employee Stock Ownership Plans or ESOPs are great for motivating and rewarding employees - and for taking advantage of incentives to borrow money. An ESOP is a qualified retirement program in which employees receive shares of the business rather than stock. ESOPs are said to be "qualified" because they qualify for federal income tax deferral until it is turned into cash at retirement. An ESOP can, for instance, borrow funds through the ESOP for expansion or other purposes, deducting both the repayment and interest when the loan is repaid. With ordinary loans, only interest payments are tax deductible. The drilling professional who sells his or her stock to the ESOP can defer or even avoid capital gains taxes associated with the sale of the business. An ESOP can also be a useful tool when it comes to buying and selling a drilling business. That’s right, an ESOP is an excellent tool for selling an interest in the business. By selling a portion of their business, an owner can invest in other assets, providing much-needed wealth diversification. According to many experts, transferring ownership to the operation’s employees in this manner is preferable to a third-party sale. Buyers may be difficult to find and, after the transaction, collecting installment payments may turn out to be difficult or costly. The ESOP can borrow money to buy out the owner's stake in the business. If, after the stock purchase, the ESOP holds more than 30% of the business's shares, the owner can defer capital gains taxes by investing the proceeds in a Qualified Replacement Property (QRP). QRPs can include stocks, bonds, and certain retirement accounts. The income stream generated by the QRP can help provide the drilling contractor with income during retirement. ESOP can also prove useful for those interested in buying a small business. Many individuals and businesses have raised the capital to finance such a purchase by selling nonvoting stock in the business to its employees. This strategy allows the purchaser to retain the voting shares and maintain control of the business. Whether used as a supplemental employee benefit plan or as a means to borrow money in a tax-favored manner, ESOP are more than a tool for retiring small business owners - or a path to easing their way out of the business. Mark Mark E. Battersby may be contacted via e-mail to michele@worldwidedrillingresource.com 27 WorldWide Drilling Resource ® JULY 2016