sec.129 plan for single-person S-corp

[Guest ngimel]

Is it possible for an S-corporation with a single owner-employee to establish sec.129 plan to cover dependent care expenses? Technically, it would fail 129(d)(4) concentration test and 129(d)(8) 55% test, however, here it is stated

that these non-discrimination tests do not apply since there are no NHCEs to discriminate against. Can anyone comment on this?

Thank you

[GBurns]

How is it going to be funded?

[Guest ngimel]

By employee contributions.

[GBurns]

Since this S corp owner-employee cannot utilize a section 125 plan to pretax the contributions, What is the benefit that you are trying to derive?

[Guest ngimel]

Since this S corp owner-employee cannot utilize a section 125 plan to pretax the contributions, What is the benefit that you are trying to derive?

Dependent care assistance programs (Sec.129) can be excluded for more than 2% S-corp owners.

Ok, I'll put my question another way - is there any way a single-person S-corp can write off $5000 in childcare costs?

[GBurns]

"Dependent care assistance programs (Sec.129) can be excluded for more than 2% S-corp owners."

Can be "excluded" from what?

An S Corp is a passthrough entity, thus making the owner the responsible party for taxes. There should be no benefit from reducing the amount passed through from the S Corp.

On the other hand eligible dependent care expenses are generally deductible by the taxpayer on Form 1040.

Off the cuff, it seems more effective to take the deduction on the F 1040, but his/her tax return prearer should be in a better position to advise since there are dependent eligibility issues and info from past returns that should be looked at in order to make a rational decision.

[Guest ngimel]

"Dependent care assistance programs (Sec.129) can be excluded for more than 2% S-corp owners."

Can be "excluded" from what?

An S Corp is a passthrough entity, thus making the owner the responsible party for taxes. There should be no benefit from reducing the amount passed through from the S Corp.

On the other hand eligible dependent care expenses are generally deductible by the taxpayer on Form 1040.

Off the cuff, it seems more effective to take the deduction on the F 1040, but his/her tax return prearer should be in a better position to advise since there are dependent eligibility issues and info from past returns that should be looked at in order to make a rational decision.

Excluded from the income of employee/shareholder and deducted by the S-corp, if only there was a way around 129(d)(4) concentration rule. This would result in bigger tax savings than using childcare tax credit on 1040, but

perhaps it is not possible. Thank for your help.

[Chaz]

You raise an interesting question. I don't think there is any guidance on whether an individual who is the sole owner and the sole employee of an S-Corp can participate in a standalone DCAP. I wouldn't want to bet that the IRS will give this arrangement its blessing. The conservative approach is to just take the tax credit.

[Guest morris]

But I think his original questin is legitimate. This is not a 125 plan, it's a 129 plan, which, as I understand it, can standalone without the need for a 125 plan in place.

[GBurns]

The Op has stated that this will be funded by employee contributions.

Where in section 129 do you find the authority to pre-tax the employee contributions?

[mbozek]

But I think his original questin is legitimate. This is not a 125 plan, it's a 129 plan, which, as I understand it, can standalone without the need for a 125 plan in place.

IRC 129(d)(4) limits the benefits of a DCAP program for owners to no more than 25% amounts paid or incurred for dependent care assistance during the year. That means if the employer pays $5000 in dependent care assistance only $1250 can be provided to the owner.

IRC 129(a)(1) provides that the exclusion of up to $5,000 for DCAP is available if assistance is furnished pursuant to a program that is described in subsectiion (d).