contribution deduction question on contributions that are deposited late

[Guest jc1457]

If an employer deposits a contribution late, am I right in saying that the contribution is no longer deductible - in any tax year. We have an employer who contributed his 2005 contribution in July 2007. We understand that the contribution was not timely and is not deductible on the 2005 Corporate Tax Return. Am I right in saying the contribution is no longer deductible - for any tax year - because it did not meet the requirements of IRS 406?

Thank you!!!

[Mike Preston]

IRS 406? What is that?

Do you mean 404(a)(6)? If so, it means it isn't deductible in 2005, that's for sure. Why it wouldn't be deductible (subject to all the appropriate limitations) in a later year?

[Guest jc1457]

Hi - yes you are right regarding the reg. My applogies - I am operating on very little sleep.

I thought that to be deductible, a contribution had to correspond to compensation paid during a year. The contribution cannot be deducted on the 2005 return because it wasn't deposited until 2007. My thought was that it couldn't be deducted on the 2007 return because it didn't correspond to 2007 compensation paid.

Am I wrong on this???

THanks again-

[Mike Preston]

Before a real answer can be given, you need to provide enough information so that a real answer can be given. What kind of plans? What kind of sponsor? Are the plan(s) ongoing? Are there employees? What are compensations for 2005, 2006, 2007? Is the tax return for 2006 on extension (is it a sole prop or a partnership)?

In general, though, a contribution to a profit sharing plan is deductible in the tax year when paid as long as the trust is qualified. If the contribution was made during 2007 for the 2005 year and it was allocated to people who had no compensation in 2007, then there is a 415 violation. That doesn't stop the amounts from being deductible, unless the IRS disqualifies the plan for this, in which case my first sentence means that it isn't then deductible.

What this all means is that if the allocation requires a correction under EPCRS then you must use that program or else the amount becomes non-deductible.

Maybe if you gave some specifics it would be easier to say something more targeted.

[Guest jc1457]

Thank you. I thought making a question lengthy would deter people from reading it.

THe employer is a PC with a Safe Harbor Profit Sharing Plan. A safe harbor contribution was calculated for 2005 but not made due to financial hardship. The employer never notified us that the contribution was not made until recently. The contribution was deposited in July 2007. We are in the process of calculating lost earnings for the time period that the contribution was late.

The employer will amend it's 2005 corporate tax return to adjust for the fact that the contributions are no longer deductible. As long as the Plan is corrected following EPCRS - then you are saying that the contribution is deductible on the 2007 return.