Accredited Wealth Management Advisor Practice Exam

What is one of the limitations of a C corporation's ESOP regarding taxes?

1. Cannot use proceeds for retirement income

2. Cannot receive favorable tax treatment

3. Stock redemptions are fully taxable

4. Must meet specific IRS requirements

The correct answer is: Must meet specific IRS requirements

The correct reasoning surrounding the limitation of a C corporation's Employee Stock Ownership Plan (ESOP) regarding taxes is rooted in the requirement to meet specific IRS guidelines. ESOPs must adhere to a set of rigorous federal regulations to maintain their qualified status. This requires compliance with certain stipulations concerning contributions, distributions, and overall operational procedures. If the ESOP fails to meet these IRS requirements, it can lead to adverse tax consequences, including the loss of favorable tax treatment or the imposition of penalties. Adhering to these regulations ensures that the ESOP can enjoy the associated tax benefits, such as the potential for tax-deductible contributions to the plan and tax deferral for participants upon distribution. In contrast, the other options reflect misunderstandings of ESOP regulations. For instance, while there may be limitations related to stock redemptions and tax treatments, analysis indicates that favorable tax treatment is indeed available under certain circumstances for ESOPs in C corporations as long as regulations are followed. Therefore, the critical aspect of compliance with IRS requirements stands out as a primary limitation affecting taxes in this context.