Deduction of Contributions to a DB Plan

[ac]

We have a client that has contributed $200,000 to their DB Plan during 2005. The minimum required is $100,000 and the maximum is $250,000. The client wants to only deduct $100,000 for 2005 and deduct the remaining $100,000 in 2006. The contribution range for 2006 should be the same.

Is this possible?

[Blinky the 3-eyed Fish]

Sure it's possible. However, assuming you don't have some "mistake of fact" mechanism to remove the money from the plan, for 2005 you have a non-deductible contribution to the plan and a nice 10% excise tax. You also need to be sure that there will be at least a $100,000 difference between the minimum required contribution and the maximum deductible contribution for 2006, so that you don't have another nondeductible contribution.

[Belgarath]

Blinky - I have a question about this. Why is the 100,000 considered "nondeductible" for 2005? Or to put it another way, it seems like the language in 4972©(1)(A)(ii) refers to the amount "allowable" as a deduction under 404. Now the 100,000 is clearly allowable as a deduction - the employer just chooses not to.

Is there additional guidance where the IRS clarifies this? It just seems to me that there shouldn't be an excise tax for a contribution that is otherwise allowable as a deduction (it didn't exceed the 404 allowable deductible amount). I saw nothing in Notice 87-27 that helps, as the examples were all concerned with having an actual previous "nondeductible" amount already in the plan.

Thanks.

[Blinky the 3-eyed Fish]

Hmm, can I just delete my answer? Yes, upon further reflection, I agree with you Belgarath.

I still do think you have some very minimal concern with 2006 in making sure there is the room between the min and max. It's very minimal though because $100k will be a nondeductible carryforward that will reduce 404 assets and because you will have a large credit balance.

[could be me maybe not]

Don't you also have the option of contributing up to the full funding limit without penalty even if it is not deductible? Another EGTRRA thing I think I thaw.

[Guest saeissler]

I think that this issue is really whether you can have an expense in one year and take the deduction for it in a later year. I'm no CPA, so I don't have a clue, although I would think not because the whole purpose would be tax evasion.

[flosfur]

Don't you also have the option of contributing up to the full funding limit without penalty even if it is not deductible?  Another EGTRRA thing I think I thaw.

Correct.

[flosfur]

We have a client that has contributed $200,000 to their DB Plan during 2005.  The minimum required is $100,000 and the maximum is $250,000.  The client wants to only deduct $100,000 for 2005 and deduct the remaining $100,000 in 2006.  The contribution range for 2006 should be the same.

Is this possible?

This is really a CPA question.

But, I think the "Carryover" of deduction works only if there is a non-deductible amount involved. Here, the dedcutible amount is up to $250k. Since they deposited $200k which is less than the maximum deductible, I don't think there is any amount to be carried over Unless a deduction over $100k would create a loss for the business entity, in which case the loss can be carried forward and deducted in subsequnt year(s).

But and more but, like "saeissler" I am no CPA, the carryover situation arises only when the required minimum contribution exceeds the sponsor's net profits (eg. when for a Sole Prop's required min contribution exceeds Sch C less 1/2 FICA).

So if your client's net profits (before the DB's $100k minimum contribution) are $100k or more, I don't think there is carryover of any amount to 2006. This is in line with saeissler's response - one cannot use prior yea(s)'s "unnecessary" expense to reduce (avoid) taxes in subsequent years.

Although, your client doesn't have a problem for 2005, he will (or should I say, may?) have a problem when it comes to taking an additional deduction in 2006 of the $100k deduction not taken for 2005.