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sec.129 plan for single-person S-corp


Guest ngimel
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Guest ngimel

Is it possible for an S-corporation with a single owner-employee to establish sec.129 plan to cover dependent care expenses? Technically, it would fail 129(d)(4) concentration test and 129(d)(8) 55% test, however, here it is stated

that these non-discrimination tests do not apply since there are no NHCEs to discriminate against. Can anyone comment on this?

Thank you

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How is it going to be funded?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Since this S corp owner-employee cannot utilize a section 125 plan to pretax the contributions, What is the benefit that you are trying to derive?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Guest ngimel
Since this S corp owner-employee cannot utilize a section 125 plan to pretax the contributions, What is the benefit that you are trying to derive?

Dependent care assistance programs (Sec.129) can be excluded for more than 2% S-corp owners.

Ok, I'll put my question another way - is there any way a single-person S-corp can write off $5000 in childcare costs?

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"Dependent care assistance programs (Sec.129) can be excluded for more than 2% S-corp owners."

Can be "excluded" from what?

An S Corp is a passthrough entity, thus making the owner the responsible party for taxes. There should be no benefit from reducing the amount passed through from the S Corp.

On the other hand eligible dependent care expenses are generally deductible by the taxpayer on Form 1040.

Off the cuff, it seems more effective to take the deduction on the F 1040, but his/her tax return prearer should be in a better position to advise since there are dependent eligibility issues and info from past returns that should be looked at in order to make a rational decision.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Guest ngimel
"Dependent care assistance programs (Sec.129) can be excluded for more than 2% S-corp owners."

Can be "excluded" from what?

An S Corp is a passthrough entity, thus making the owner the responsible party for taxes. There should be no benefit from reducing the amount passed through from the S Corp.

On the other hand eligible dependent care expenses are generally deductible by the taxpayer on Form 1040.

Off the cuff, it seems more effective to take the deduction on the F 1040, but his/her tax return prearer should be in a better position to advise since there are dependent eligibility issues and info from past returns that should be looked at in order to make a rational decision.

Excluded from the income of employee/shareholder and deducted by the S-corp, if only there was a way around 129(d)(4) concentration rule. This would result in bigger tax savings than using childcare tax credit on 1040, but

perhaps it is not possible. Thank for your help.

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You raise an interesting question. I don't think there is any guidance on whether an individual who is the sole owner and the sole employee of an S-Corp can participate in a standalone DCAP. I wouldn't want to bet that the IRS will give this arrangement its blessing. The conservative approach is to just take the tax credit.

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  • 1 month later...
Guest morris

But I think his original questin is legitimate. This is not a 125 plan, it's a 129 plan, which, as I understand it, can standalone without the need for a 125 plan in place.

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The Op has stated that this will be funded by employee contributions.

Where in section 129 do you find the authority to pre-tax the employee contributions?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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But I think his original questin is legitimate. This is not a 125 plan, it's a 129 plan, which, as I understand it, can standalone without the need for a 125 plan in place.

IRC 129(d)(4) limits the benefits of a DCAP program for owners to no more than 25% amounts paid or incurred for dependent care assistance during the year. That means if the employer pays $5000 in dependent care assistance only $1250 can be provided to the owner.

IRC 129(a)(1) provides that the exclusion of up to $5,000 for DCAP is available if assistance is furnished pursuant to a program that is described in subsectiion (d).

mjb

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