Deductibility - change in corporate tax year

[Guest bill parks]

A corporation has a tax year ending September 30, 2003. It will elect a short tax year for federal income tax purposes for the period October 1, 2003 through December 31, 2003 and then become a calendar year taxpayer as of January 1, 2004. The corporation is a LLC, taxed as a partnership.

The corporation has never had a qualified retirement plan. It plans to establish a plan by 9/30/03 with an efective date of 1/1/03, a Plan Year of 1/1 through 12/31/03 and a limitation year of 1/1/ through 12/31/03.

As the first plan year will not end during the current fiscal year end of 9/30/03 but will be effective before the close of the 9/30 fiscal year how much may it deduct and when?

I believe it may not take any deduction, other than start-up and administration costs, for the tax year ending 9/30/03. But how much may it deduct for the short plan year ending 12/31/03 - 25% of the Compensation paid during calendar year 2003 or 25% of the Compensation paid during the short plan year? May it adopt a first Plan Year of 1/1 through 12/31 or must it adopt a short plan year as its first plan year? If the latter, may it use calendar year Compensation or short year compensation?

[Blinky the 3-eyed Fish]

Because you mention the 25% limit, I will assume this is a DC plan. That being said, the deduction limit is 25% of the compensation paid in the taxable year. So for the FYE 9/30/03 you can have a deduction of that amount even if the amount is allocated for the PYE 12/31/03. If say your allocation for the PYE 12/31/03 exceeded the deductible amount for the FYE 9/30/03, you would have room to pick up some more deduction for the short FYE 12/31/03 of up to 25% of compensation for that period.

You can have a first year PY of 1/1/03 - 12/31/03.

[Mike Preston]

Why in heavens name doesn't it adopt a plan with a 10/1/2002 through 9/30/2003 initial plan year and then change the plan year to 12/31/03? Wouldn't that solve all the problems of not knowing what falls into what year?