Tax Deduction Issue for PS Plans

[Guest DNH]

If a plan sponsor deposited, tax deducted and filed its corporate tax return for the 2007 plan/calendar year, then TPA learns that final 401(a)(4) test fails and requires Group B to get additional contribution, i.e. 5% to Group B now must be 5.25%, can the plan sponsor deposit the additional contribution money in 2008 and deduct that additional money on its 2008 corporate tax return (assuming that in 2008 that the total contribution including the 2007 additional monies is still under the 25% threshhold)? Would appreciate comments. Thank you.

[J Simmons]

Yes

[Guest Sieve]

To expand on the prior affirmative answer, you might still be able to deduct this contribution on the 2007 return. If the additional contribution in 2008 is made before the due date, as extended, for filing the company's 2007 tax return (you say that the plan year/fiscal year are both calendar years)--assuming that an extension was timely obtained and that part of the extension was actually used--then this contribution can still be deducted on the 2007 return (by filing an amended return, if necessary) since it relates to 2007. That extended due date would be September 15, 2008 for a calendar year filer. If you did not request an extension or did not use a requested extension, then the 2008 return comes into play.

[Guest DNH]

To expand on the prior affirmative answer, you might still be able to deduct this contribution on the 2007 return. If the additional contribution in 2008 is made before the due date, as extended, for filing the company's 2007 tax return (you say that the plan year/fiscal year are both calendar years)--assuming that an extension was timely obtained and that part of the extension was actually used--then this contribution can still be deducted on the 2007 return (by filing an amended return, if necessary) since it relates to 2007. That extended due date would be September 15, 2008 for a calendar year filer. If you did not request an extension or did not use a requested extension, then the 2008 return comes into play.

Thank you for your time in answering. Greatly appreciated! DNH

[Jim Chad]

I can't remember ever having heard or read that the requested extension must be used. Can anyone expand on that?

[GBurns]

Why is a requested extension needed in order to amend a filed return ?

I do not agree that a correction made (with contribution change) in 2008 can be deducted on an amended 2007 return, but that does not seem to be what the OP was considering anyhow. The expense was paid in 2008 and my opinion is that it was also incurred in 2008 when the results of the tests were known.

There might be a funding deadline that might have relevance, but I do not see any relevance of tax return due date or extension date.

[Guest Sieve]

I agree that, if deduction limits are otherwise met, the additional contribution for 2007 can be taken as a 2008 deduction since it was paid into the plan in 2008. Perhaps that answers the entire question. But, I simply was offering the thought that there might be another available approach--potentially deducting that extra portion of the 2007 contribution (made in 2008) on the 2007 return (which, under the facts presented, would require the filing of an amended 2007 return). It was a throw-away comment, being offered for whatever practical help it might provide to the questioner. But, let me explain lest there be any misconceptions (and, Jim, read on, because the extension must be used in order for a contribution to be deductible if made after the original due date). And here was my thought process . . .

Taxpayer (T) can make a deductible contribution for year X until the extended due date for filing T's federal income tax return for year X. But, if T files the return timely (i.e., on or before its original due date), then the deadline for making the deductible contribution for year X ends on the orginal due date (and not the potential extended due date) for filing the tax return for year X, even if an extension was obtained. (There is some controvery on this point -- http://benefitslink.com/boards/index.php?showtopic=34839 -- but, being conservative by nature, I subscribe to the view I have stated.) So, if T is a calendar year corporate taxpayer and files the 2007 return on or before 3/15/2008, T cannot delay the time peirod for making a deductible contribution for 2007 beyond 3/15/2008 (the original due date of the return). However, if T obtains an extension for filing the 2007 return, and, e.g., files the return on 3/20/2008, then T has the ENTIRE extended time period (until 9/15/2008) to make the deductible contribution for 2007. (It is my understanding that the extension is not treated as ending, for this purpose, when the return is actually filed when on extension, but on the due date as actually extended.) So, in the matter before us, if the 2007 return (i) was on extension, and (ii) was filed by using some of that extension (i.e., after the original due date), and, additionally, if the extension had not yet expired when the additional 2007 contribution was made, then that contribution made for 2007 before the extended due date is deductible in 2007, and the 2007 return can be amended to include that deductible contribuion. (It would be like filing your personal tax return on 3/1, and then making an IRA contribution on 4/10 and filing an amended return as a result of the additional deductible expense. Of course, the extended due date has no bearing on an IRA contribution/deduction.)

I understand that this issue was not what DNH asked about, but I offered this as an alternative approach, if it fit the facts. (By the way, there are other strings on this deduction timing issue, but we certainly can discuss again, if you like--but, Jim, we may have to agree to disagree . . .)

[BeckyMiller]

All of this discussion is grounded in IRC Section 404(a)(6) which was interpreted in Rev. Rul. 76-28. Though old, it is still the authority on how the IRS sees this matter. If the 2007 tax return covers the same period as the plan year and is under extension at this time, it sounds as though there would be basis for taking the deduction on the 2007 return. If that return was filed by March 15, 2008 without extension, the deduction would be delayed to the 2008 year. Any facts outside those clear cut-offs need to be specifically examined by the client's tax advisor.