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Contribution funding and tax return extensions


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If a corporate taxpayer and plan sponsor files for an extension of time to file its tax return, extending the filing deadline from March 15th to September 15th, but then files their tax return on March 13th, should they have funded the profit-sharing contribution deducted on the tax return by March 15th or is the extension to September 15th still recognized? Something in the back of my mind tells me the IRS can invalidate the extension if the return is filed by the original due date.

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Seems like your situation is similar to the one described in rev. rul. 66-144. The IRS ruled that the extension was valid for purposes of extending the deadline to make a plan contribution.

https://www.taxnotes.com/research/federal/irs-guidance/revenue-rulings/rev.-rul.-66-144/d5wt

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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C. B. Zeller, thanks for posting. I had heard that filing on time invalidates the extension several times but always wondered if it was an old wive's tale or whatever you want to call it.

I am curious if anyone has a cite for the opposing view.

Ed Snyder

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  • 2 weeks later...

Thanks all --- I have always advised my clients to err on the side of conservatism and simply wait to file the tax return until after the original due date if they have extended the return for funding purposes. Thanks to C.B. for the cite!!! Tells me I don't need to be so concerned. I wouldn't think the cash versus accrual would make a difference since cash basis taxpayers have always been treated as "accrual basis" taxpayers solely for the purpose of the retirement plan contribution.  

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3 hours ago, JPIngold said:

I wouldn't think the cash versus accrual would make a difference since cash basis taxpayers have always been treated as "accrual basis" taxpayers solely for the purpose of the retirement plan contribution.  

I agree

Ed Snyder

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Some observations:

  • cash or accrual is not relevant to the timing of the deposit.
  • the designation of the tax year of deduction of a contribution made after year end is somewhat flexible, but there are explicit requirements to do so.
  • filing before the original due date can impact the timing for the contribution to be deductible.

Here are some cites worth noting:

Rules for timing of deductions primarily are based on Revenue Ruling 76-28, and as illuminated further by PLRs 200311036 and 8336006.

From the Rev Rul 76-28

"Whether a taxpayer is on the cash or accrual method of accounting, and whether or not the conditions for accrual otherwise generally required of accrual basis taxpayers have been met, a payment made after the close of an employer's taxable year to which amended section 404(a)(6) applies shall be considered to be on account of the preceding taxable year if

(a) the payment is treated by the plan in the same manner that the plan would treat a payment actually received on the last day of such preceding taxable year of the employer, and

(b) either of the following conditions is satisfied.

  (1) The employer designates the payment in writing to the plan administrator or trustee as a payment on account of the employer's preceding taxable year, or

  (2) The employer claims such payment as a deduction on his tax return for such preceding taxable year (or, in the case of a contribution by a partnership on behalf of a partner, the contribution is shown on schedule K of the partnership tax return for such year).

For purposes of the above requirements, the [all of] following rules shall apply.

First, a payment may be designated as a payment on account of the preceding taxable year in the manner provided above at any time on or before the due date of the employer's tax return for such year (including extensions thereof).

Second, employers whose tax returns are due (including extensions thereof) on or before [original due date], may, at any time on or before [extended due date], either designate such payment in the manner provided above or file an amended return claiming such payment in the manner provided above.

Third, once a payment has been designated or claimed on a return in the manner provided above as being on account of a preceding taxable year, the choice made shall be irrevocable and an employer may not retract or change such designation or claim."

PLR 200311036 describes a situation where:

  • The company filed for an extension of the 2001 corporate tax return before the original due date in 2002.
  • In 2002, the company made a contribution in May designated in writing as a 2002 contribution.
  • The actuary commented if the contribution was designated in writing as a 2001 contribution, it would be deductible in 2001.
  • The company changed the designation of the contribution in June to 2001.
  • The company filed 2001 corporate taxes in September not later than the filing due date (including extensions thereof) claiming the deduction for 2001.
  • The deduction was allowed.

PLR 8336006 describes a situation where:

  • The company filed the corporate tax return prior to its original due date.
  • An extension was filed after the return was filed but before the original due date of the return.  (There was some question about whether the IRS received the extension but it turns out that was not relevant to the outcome.  Just a little foreshadowing of the outcome.)
  • The contributions were funded shortly after the original due date of the return.
  • The ruling was the filing of the return started "starts the running of the period of limitations on assessment and collection and is considered as filed on the last day prescribed for its filing. This period is determined without regard to any extension of time for filing." so the contributions were late.
  • Subsequent comments on this PLR note that if the contributions had been funded after the filing of the tax return but before the original due of the return, the contributions were deductible on the return.

 

 

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