Corp deduction on 2002 contribution

[imchipbrown]

My client is a calendar year corporation and the sponsor a Profit Sharing/401(k) Plan. They will be depositing $100,000, by their 9/15/03 corp filing deadline, representing a discretionary match on the employees 2002 401(k) deferrals. Can they deduct, if they so choose the $100,000 on their 2003 corporate return (vs their 2002 corp return) , even though it relates to the 2002 plan year? Assume the $100,000 is below 25% of eligible comp for 2002 and 2003.

[Belgarath]

I would, as always, refer them to their accountant for confirmation, but my opinion is yes. This does get a little interesting, because if you look solely at 404(a)(6), it seems to give you the opposite answer. It's one of those questions that I've always simply accepted what I've seen from some of the experts. I know Sal Tripodi (ERISA Outline Book) believes you can, and I also saw an outline from Kevin Donovan from some Webcast where he concludes that you can. He referred to Rev. Ruling 77-82, as well as PLR 9107033. Hope this helps.

[mbozek]

Rev Rul 76-28 allows an employer to deduct contributions in the prior tax year made by the due date for filing the tax return with extensions if the plan treats the contributions as received on the last day of such year and the employer claims it as a deduction on the tax return. If the employer's tax yr ends before the plan year, then only the pro rata portion of the contributions attributable to compensation paid up to the end of the tax year will be deductible. Rev rul 90-105. Rev. rul 77-82 applies to DB plans only.

[Appleby]

I too would defer to the accountant…but want to add my 2-cents anyway

I always thought that Rev. Rul 77-82 applies to any plan that is subjected to minimum funding standards- not just DB plans. I agree that Rev. Rul. 77-82 does not apply to Chip’s scenario as it ( Chip’s scenario) does not refer to a plan subject to Section 412. Rev. Rul 77-82 allowed contributions made in accordance with 404(a)(6) to apply to the following year for purposes of meeting the minimum funding standards- not for deduction purposes.

PLR 9107033 also applies to plans subject to the minimum funding standard ...it granted an exemption to the 10 percent excise tax for nondeductible contributions, which came about because a conditional waiver was granted for the minimum funding standard for the year. The company was allowed to treat contributions for one year ( which met the requirements of 404(a)(6)) as contributions for the following year

IMO, if the amount is contributed by the tax filing deadline for the year to which it applies, two things could happen.

1. The employer could apply the contribution ( for tax deduction purposes) to the year to which it relates or

2. Since the contribution is discretionary, apply it to the year it was contributed and deduct it for that year( of deposit)---unless the employees were already promised this contribution for 2002…