Deductible limit

[Guest MAS51361]

Posted for a collegue:

QUESTION

"IF you have non-deductible carryovers from prior years that were the result of amounts necessary to meet 412 minimum funding (but greater than net compensation for those years), CAN you deduct these amounts in the current year IN ADDITION TO the 412 minimum funding amount for the current year (even if the total is greater than the otherwise determinable maximum under 404) AS LONG AS the current year's deduction is no greater than the current year's net compensation?"

COMMENT

We think the answer is YES, because of the language in 404(a) which says (emphasis added):

"contributions…..shall be deductible under this section, subject to the following limitations…in an amount determinated as follows:

404(a)(1)(A)(i) the amount necessary to satisfy the minimum funding standard provided by section 412(a) for plan years ending within or with such taxable year (or for any prior plan year), if such amount is greater than the amount determined under clause (ii) or (iii) (whichever is applicable with respect to the plan)"

Thanks for your comments.

[FAPInJax]

This was a topic of discussion at the EA meeting.

The answer is contingent on the reason it was not deductible in the prior year. The 404(a)(7) (hopefully I got the section right) states that it would be deductible IF the SOLE reason it was not deductible in the prior year was due to timing.

Therefore, if a sole proprietor makes a contribution but can not deduct it because he did not have enought income the contribution is NOT deductible in the subsequent year because the SOLE reason is not timing.

[Blinky the 3-eyed Fish]

The code section is incorrect but Frank's point is valid. There are rules involving "includible contributions" (do a search to find prior discussions and cites on this topic) which describe which contributions made for 412 are able to be deducted. Mas, to read 404(a)(1)(A)(i) in that manner would be to negate the need for the includible contributions rule.

Therefore, I disagree with your conclusion that the bolded language entitles you to deduct any and all required contributions in a future plan year by rule. I agree it is confusing though.

To the practical side, with the nondeductible contributions reducing 404 assets, have you looked at the unfunded current liability deduction? Unless there has been an amendment to the plan raising benefits for HCE's in the last 2 years, you should easily have some room there.