Company:Company contributions and dividend payments held within the ESOP are tax-exempt, with certain restrictions. A leveraged ESOP, one in which a loan is used to finance the purchase of stock by the ESOP, offers added tax benefits. Both principal and interest payments are pre-tax expenses.

Seller:The seller has a tax incentive called the 1042 rollover or the capital gains rollover. This amounts to a deferral of capital gains tax payments on sale of stock to an ESOP. To take advantage of this tax incentive, the ESOP must own at least 30% of the firm.

Employees:Company contributions to the ESOP are tax-sheltered for employees; so is the increase in value of employee accounts.Employees do not pay taxes on the stock in their accounts until they cash out at retirement or after leaving the company.