Employee Stock Plan Limits How Corporation Can Deduct Wages

The owners of a pass-through corporation can’t take a tax deduction for wages paid to employees who participate in an employee stock ownership plan until the year those wages are received, the Tenth Circuit ruled.

The corporation and its ESOP-covered employees are “related taxpayers” under a code provision limiting the timing of deductions, the court held May 15. The ESOP—a federally regulated retirement plan that allows workers to invest in company stock—qualifies as a “trust” and its participants qualify as “beneficiaries” for purposes of tax code section 267, the court said.

The case illustrates the tax issues that can arise ...