I have an S-Corp that is starting up a leveraged esop. They currently have a separate 401(k) plan in existence. I am trying to figure out if the employer will be able to deduct 25% of eligible comp. Since they are an S-corp they do do not qualify for the 25% limit because of the leveraged note. Most of the research is vague. Since an esop is a defined contribution plan and they are now maintaining two it looks like they will be able to take advantage of the 25% limit, but I can find nothing conclusive on this. Does anyone have any conclusions on this?

Unless the Company has a money purchase ESOP, it has a 15% deduction limit.

The 25% deduction limit will also be available to the extent that the company has pre-1987 "credit carryovers" available under IRC Section 404(a)(3)(A)(v).