Sole Prop/S-Corp & DB Contribution

[flosfur]

A sole prop's deduction for a pension plan is limited to the net Sch C earnings minus 1/2 Self Employment Tax.

A sole prop's net profits are $20k with a required DB contribution of $100k, $80k+ of which cannot be deducted.

Compare this with:

A one-person S-Corp has revenue of $25k, $5k of non pension plan expenses and $100k of contribution for the DB plan it sponsors, thus creating a loss of $80k.

The loss of $80k flows to the only shareholder and ends up on his/her Form 1040 (line 17 for yr 2005) thus reducing his/her other taxable income of any description (shareholder/spouse's W2, investment income...) which far exceeds the S-Corp loss of $80k.

The DB contribution will be paid by the S-Corp with the money loaned by the S-Corp's shareholder.

Ignoring the issues relating to the loan from the owner to the corp (interest on the loan/imputed income..), corporate taxes and extra admin expenses, is there anything wrong with the above mentioned S-Corp situation?

[Guest mjb]

Under IRC 1366(d) the max deduction/losses for a tax yr cannot exceed the S corp owner's basis (e.g., equity) in the S Corp. Have you asked the accountant for the S corp what is the max deduction? You need to determine if the loan from the S corp owner to the S corp to pay for plan contributions violates any other tax law provisions e.g., prohibited transactions under IRC 4975.

[Dougsbpc]

mjb

Good point on checking with the accountant to make sure the loss does not exceed the basis. But why would there be any tax law violation or prohibited transaction for an S-corp shareholder to lend money to the corporation? The pension contribution would be considered an ordinary and necessary expense of the corporation. The shareholder would not be making a loan directly to the plan (prohibited transaction) but instead to the corporation.

[flosfur]

Under IRC 1366(d) the max deduction/losses for a tax yr cannot exceed the S corp owner's basis (e.g., equity) in the S Corp. Have you asked the accountant for the S corp what is the max deduction? You need to determine if the loan from the S corp owner to the S corp to pay for plan contributions violates any other tax law provisions e.g., prohibited transactions under IRC 4975.

This approach was put forward by the accountant.

[SoCalActuary]

It is also important to ask the accountant if the deduction can be claimed in later years.

Or did they just adjust the cost basis of the S-Corp?

I would like to understand better how the tax deductions will flow in both entities, the sole prop

and the S-Corp.

When there is future income to apply against the deduction, who will get the deduction?

Any accountants out there who can explain this?