Thinking about how to best exit your construction or contracting business? It’s smart to plan early, especially since it’s one of the biggest financial moments of an owner’s career. And while you’re thinking about legacy, leadership, and what comes next, one concern might be rising to the top: taxes. 

How do you keep as much hard-earned wealth and value as possible while you exit?

Selling a business often triggers large capital gains, income taxes, and ongoing corporate tax obligations. But there’s a lesser-known path that can significantly reduce (and in some cases eliminate) those taxes altogether: selling to an

Employee Stock Ownership Plan, or ESOP.

If you’ve ever wondered why more contractors are choosing an ESOP for their succession plan, this is one of the biggest strategic reasons. Let’s take a closer look at the core benefits and how the process works.

1. Owners Can Defer, or Even Eliminate, Capital Gains Taxes

When you sell your company to an ESOP, you may be eligible for what’s called a 1042 rollover.The 1042 rollover allows sellers to defer the capital gains tax on the sale proceeds. When structured and managed properly, this deferral becomes permanent, effectively eliminating taxes on the sale and resulting in more wealth to selling shareholders.

For many owners, this is one of the biggest tax advantages available in any exit strategy, not just ESOPs. It allows you to keep more of the proceeds you’ve earned over decades of building your business.

Third-party sales simply can’t offer this.

2. A Fully ESOP-Owned S-Corporation Pays No Federal Income Tax

This is the part that almost sounds too good to be true.

If your business operates as an S-Corp which is 100% owned by an ESOP trust, as the trust is tax exempt, the company’s corporate tax liability is eliminated and it pays no corporate income tax.

That means more cash stays inside the business, creating:

• Stronger cash flow
• More funds for reinvestment
• More stability during economic cycles
• A healthier balance sheet for bonding and growth

This is a major reason ESOPs are particularly attractive for construction businesses, where margins matter and cash flow is the lifeblood of every project.

For contractors used to tight budgets, this structure can make an ESOP transition significantly easier to finance than a traditional sale.

3. Why These ESOP Tax Advantages Matter Specifically for Contractors

Construction and trade businesses have unique financial pressures:

• High labor costs
• Cyclical revenue
• Heavy bonding requirements
• Equipment-intensive operations
• Tight margins

ESOP tax advantages can ease those pressures by keeping more cash inside the business. That additional liquidity can help your company:

• Compete for larger projects
• Invest in equipment
• Weather seasonal slowdowns
• Strengthen its balance sheet
• Attract and retain key talent
• Improve bonding capacity

In companies operating in industries like concrete, electrical, landscaping, HVAC, plumbing, painting, and general contracting, the ability to reinvest tax savings directly into operations is a game-changer.

FAQ: How ESOP Tax Benefits Apply to Different Contractors

Q. Do ESOP tax advantages help concrete contractors?

Absolutely. Concrete businesses typically have high equipment costs and seasonal cash flow swings. ESOP tax exemptions free up capital that can be reinvested into mixers, trucks, operations, and payroll during slower months.

Q. What about landscapers or lawn care companies?

Landscaping companies often struggle with seasonal revenue fluctuations. The tax savings from an ESOP help stabilize year-round operations and make ownership transitions more affordable.

Q. Can an ESOP help electrical or HVAC companies?

Yes. Skilled-trade companies benefit from being able to reinvest tax savings into hiring, training, and retaining licensed technicians - critical in a labor-tight market.

Q. Does the 1042 rollover apply to specialty contractors?

It does, as long as the business qualifies as (or converts to) a C-Corp before the sale. This includes specialty trades like fire protection, steel erection, roofing, and commercial painting.

Q. Is an ESOP still worth it if my business isn’t huge?

Many ESOPs work well for companies as small as $8M–$20M in annual revenue, depending on the cost structure, margins, employee base, and growth potential. If a company has more than 25 W-2 employees and over $1M in net profit, it makes sense to consider an ESOP as an option.

Have more questions? Contact us at ESOP for Contractors. We’ve been right in your shoes, and can help you navigate your options.