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Deducting 2020 and 2021 in 2021


austin3515
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Plan A wants to contribute $50,000 for the 2020 year but needs more deductions in 2021.  Can they deduct the 2020 contributions (which are deposited in 2021) on the  2021 tax return (i.e., you can always deduct on the cash basis) and then use the special 404a6 timing rule to deduct 2021's contributions (which are funded in 2022)  on the 2021 tax return as well?  The combined deduction is less than 25% of 2021's comp (it's a virtual certainty so that is not a concern).

My position has always been "of course because both deductions are perfectly legal, so why in the world 2 completely allowable deductions be disallowed?"  There is simply no rule on the books that says you cant take them both.

Now someone did mention that maybe there is some tax law that says you have to have consistency in approaches, and to that I can't speak.  Anyone have some first hand knowledge on that?

Austin Powers, CPA, QPA, ERPA

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my 2 cents - agree with Lou S and wouldn't you have the same scenario if a plan switched from an accrued to a cash basis?  I realize that would only be for the one year, but it sounds like that's what you have here as well.

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  • 2 weeks later...

(6) Time when contributions deemed made

For purposes of paragraphs (1), (2), and (3), a taxpayer shall be deemed to have made a payment on the last day of the preceding taxable year if the payment is on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (including extensions thereof).

According to a "national legend" this leaves no wiggle room.  If you deposit in the window described it as though you actually deposited the money on 12/31/2020 and you must deduct on 2020 return.  HE said the only way to really accomplish this was to wait until after the due date of the return and deposit in the 415 grace period (which is 30 days after the deduction due date).

I did not have time to poll a few CPA's as I am really confident that they are doing just this "fairly regularly." (i.e. deducting contributions on a cash basis).  OBviously it is not the norm, but some do it for example because they are "trapped" as it was done once that way and they don't want to double up the deductions in one year.

Anyway I thought it was important to share this update with y'all!

Austin Powers, CPA, QPA, ERPA

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If you look at the EOB, on page 7.696 of the 2020 version, there is a discussion of this issue. Somewhat less rigid than what you are describing. Worth looking at, but since this is a deduction issue, I'd present it to the CPA, and it is their choice!

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I actually saw an IRS training manual in which the IRS said "it's their choice" and its on theor website.  This "individual" said he wasnt thrilled about relying on a 20 year old document...

But I will send!

Austin Powers, CPA, QPA, ERPA

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Here are the slides from a presentation at an ASPPA conference a few years ago. It was about DB plans but I don't see any reason why the deduction timing question would be any different for a DC plan.

https://www.asppa.org/sites/asppa.org/files/PDFs/2016AnnualHandouts/WS18 - Deduction Limits for DB Plans and Combined Plans.pdf (deduction timing starts on page 24)

On page 27 they cite a PLR where the IRS allowed a plan sponsor to take a deduction in 1989 for a contribution made in 1989 that was used to satisfy minimum funding for the 1988 plan year. I know that a PLR can't be relied upon as precedent but it does show that the issue is not as clear-cut as this individual may feel. Of course, if they weren't thrilled about relying on a 20-year-old document, they would probably be even less excited about a 30-year-old ruling that does not even provide reliance.

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Well the difference I guess is that 404a6 doesn;t apply to a defined benefit plan.  Th crux of the case is that 404a6 makes it obligatory to treat as deposited on last day of prior year.

Austin Powers, CPA, QPA, ERPA

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