DB required contribution exceeds S-Corp Income

[Guest TracyAndrews]

An S-corporation maintains a one man DB Plan. He has 30,000 in salary for 2000. His required contribution for the year is $60,000. His S-Corp income is also $30,000. How much can he deduct from the business? Can he take a loss of $30,000? Or can he only deduct the $30,000 from his profits?. Section 172 seems to indicate that you can't deduct net operating losses. What is done in this situation?

[david rigby]

I believe the (oversimplified) answer is that you cannot use the deduction to generate a net operating loss. Perhaps some expert can give us a course in S-corp 101.

[AndyH]

I would also sign up for the course in S-Corp 101, if there is someone out there willing to teach it here.

[Guest PAUL DUGAN]

I agree with Pax if you were not incorperated. I know I have made PS contribs several times and taken a carry back loss (no questions from the IRS only a check). My plan and the law state that PS contribs. can be made from current or accumilated profits (if I remember right a law chance 15-20 years ago).

However I am a c-corp. May be I need s-corp 101 also.

I do know it has to made whether or not deductable (minimum funding requirements).

[BeckyMiller]

O.K. S corp. 101.

The whole world of fringe benefits in the context of an S corporation is complicated by IRC Section 1372 which says that any 2 percent or greater shareholder in an S corporation is treated as a partner in a partnership for purposes of any provision in the tax code pertaining to fringe benefits.

But, this section does not result in the shareholder being treated as a partner with respect to the net income of the S corporation. The shareholder still has wages, reported on Form W-2. It just excludes these shareholders from the benefits of a cafeteria plan, tax-advantaged employer provided health coverage, etc.

In this context, the analysis is performed as if the company were a regular C corporation. Wages are $30,000, minimum funding is $60,000. Profits before such contribution, but after deduction for the wages are $30,000. If the contribution is made on a timely basis, the corporation gets a tax-deduction for $60,000 and shows a loss of $30,000.

If the shareholder has sufficient basis in the corporation, he can deduct that loss on his personal tax return. If he does not have sufficient basis, the deduction is carried forward until such time as he has basis.

This is S Corporation 101, that means that there may be special circumstances that would change the above scenario.

Does that help?

[Kirk Maldonado]

I think that people may want to consider the following provisions in determining the proper tax treatment of those contributions.

Internal Revenue Code Section Section 172(d)(4)(D) provides as follows:

(4) Nonbusiness deductions of taxpayers other than corporations.

In the case of a taxpayer other than a corporation, the deductions allowable by this chapter which are not attributable to a taxpayer's trade or business shall be allowed only to the extent of the amount of the gross income not derived from such trade or business. For purposes of the preceding sentence—

* * *

(D) any deduction allowed under section 404 to the extent attributable to contributions which are made on behalf of an individual who is an employee within the meaning of section 401©(1) shall not be treated as attributable to the trade or business of such individual.

Treasury Regulation Section 1.172-3(a)(3)(iv) provides as follows:

(iv) Self-employed retirement plans. Any deduction allowed under section 404, relating to contributions of an employer to an employees' trust or annuity plan, or under section 405©, relating to contributions to a bond purchase plan, to the extent attributable to contributions made on behalf of an individual while he is an employee within the meaning of section 401©(1), shall not be treated, for purposes of section 172(d)(4), as attributable to, or derived from, the taxpayer's trade or business, but shall be treated as a nonbusiness deduction.

[Belgarath]

So what does this really mean?

Let's say the S-corporation dissolves. Ignoring the extra pension contribution for the moment, there is "basis" of $200,000. For 3 years, the required DB contribution was $30,000 more than the W-2 income of the shareholder, for a total of $90,000.

Was the $30,000 currently deductible on the shareholder's 1040 for each of the last 3 years when the contribution was made, and the basis was correspondingly reduced? Or something else altogether?

[Guest mjb]

Under IRC 1366(d) the amount of a shareholder's deductible losses with respect to an S-Corp for any tax year is limited to the amount the taxpayer has at risk in the business, e.g. basis of the owners stock in the S corp plus the owner's adjusted basis in the indebtedness of the S Corp. If the owners basis in the S corp is only 40k and the losses of the S corp attributable to pension contribution for the yr is 90k, the amount deductible as a loss by the S corp owner on his 1040 is limited to 40k. I dont see the connection to IRC 172 in an S corp b/c the pension plan deduction is claimed by the S corp, not passed through to the s corp owner.