S-Corp and timing of deduction

[John Feldt ERPA CPC QPA]

If:

1) an S-Corp is planning to deduct a large DB contribution for 2006, and

2) they file for an extension for their S-Corp return to September 15, 2007, and

2) they plan to contribute on or before September 14, 2007 and then file the S-Corp return,

then, are the individual S-Corp shareholders required to extend their individual 2006 tax returns (1040) in order to justify that DB plan deduction against the S-Corp income for 2006 for their tax purposes?

I wouldn't think so, but I am not a CPA.

The client's CPA asked this question.

[JAY21]

I'm not a CPA either, and can't provide an exact cite, but it seems to me if the only reason the S-Corp. is extending their tax return is for more time to make the DB contribution (i.e., all other expenses and deductions of the corporation have been calculated for 2006) and the DB contribution amount has been calculated and is known, then I don't see any reason why the 1040's would have to be extended.The 1040's should be able to be filed early and reflect the impact of the 2006 contribution on the S-Corp tax return and subsequent flow-through of any remaining net income to the respective 1040's.

The S-Corp. is the sponsor of the plan (not the individual) and the contribution need only be made by the due date of the S-Corp tax return (including extensions) to be deductible (and by 9/15 for Min. Funding requirements). I just don't see any tie in with the 1040 due date if the 1040 has all the net income reflected properly.

[wsp]

You do not have to wait. Once the contribution is calculated and the S-Corp's return is finalized you can file the 1040's. The 1120S (corporate return) can be filed later. Any change after the fact will require amended returns of course.

<per one of the CPA's on staff at my firm>

[AndyH]

Could you clarify that please. Clearly you don't have to wait for the contribution to be funded. The question is whether the 1040 must be extended so that it is not due before the deposit is made.

My assumption is that an extension would be required, but I have never gotten a definitive answer to this question.

Also, I think the initial 1040 extension is to 8/15, not 9/15 so that is another potential trap.

[wsp]

Could you clarify that please. Clearly you don't have to wait for the contribution to be funded. The question is whether the 1040 must be extended so that it is not due before the deposit is made.

My assumption is that an extension would be required, but I have never gotten a definitive answer to this question.

Also, I think the initial 1040 extension is to 8/15, not 9/15 so that is another potential trap.

Extend only the 1120S to get the funding extension. Extending of the 1040's has no impact on the deadline for the funding of the S-Corp. However, because the income passes through, if there is a doubt as to the ability of the S-Corp to actually fund the large contribution or if it's a possibility that the contribution may change prior to funding then it would be wise to extend. Alternative would be to file and amend the 1040 if the contribution changes.

btw extension of 1040 is now 10/15 so that eliminates some confusion in that regard. So if you're truly fearful you can extend just to make it easier to sleep at night.