Contribution & Deduction Timing

[richard]

Does the following idea work (or what's wrong with what I have in mind?)

Company X sponsors a DB plan for its one employee. Both the business and the plan are 12/31. 1999 minimum required contribution is $60,000 and maximum deductible is $80,000, similar to prior years.

The business owner would like a small deduction for 1999, around $25,000, and then return to his "usual" deductions (60-80K) in future years.

Let's assume that changing the plan formula, assumptions, funding method, etc. are not options.

I propose that he make a $25,000 contribution on or before 3/15/00, NOT go on corporate tax extension for 1999, and make the remaining $35,000 contribution between 3/16/00 and 7/31/00. With this approach, he will have made his required 1999 minimum contribution by 7/31/00 (and met minimum funding standards), but only $25,000 would be deductible for 1999 (since the other $35,000 was made after the corporate tax deadline).

I think that works for 1999.

But what about 2000?

Assuming the min/max for 2000 is again 60-80K, I would suggest him contributing $45,000 on or before 3/15/01, NOT going on tax extension for 2000, and contributing the remaining $15,000 between 3/16/01 and 7/31/01. In this case, the minimum funding requirement of $60,000 would be met for 2000 (the $45,000 contribution and the $15,000 contribution). $80,000 would be deductible for 2000 (the $35,000 contributed in early 2000 for 1999 but not deducted because it was contributed after 3/15/00, plus the $45,000 contributed before 3/15/01 for 2000).

The $15,000 contributed before 7/31/01 (which was used to meet the 2000 minimum funding requirement) would be deducted for 2001.

2001 and later years would be treated similarly.

Did I miss anything?

[several points. I recognize that the contribution timing is extremely critical and must be coordinated carefully with the tax filing deadline. That's OK because the client is very sophisticated.

Also, I don't think there is a 10% excise tax for any nondeductible contributions as long as these contributions are made in the same year as the deduction. For example, there is no excise tax on the $35,000 contribution made in early 2000 that is used for 1999 minimum funding and is deductible for 2000.

Finally, I recognize that starting in 2000, we might have to do two actuarial valuations each year because there are different asset values (one for 412 minimum and one for 404 maximum).]

Thanks.

would like to deduct

[david rigby]

I'll try.

Yes, it is possible that the 1/1/2000 asset values will be different for determining the min contribution (412) and deductible limit(404).

I'm not sure that it matters whether the sponsor files an extension for tax purposes for the 1999 FY. It also may be that both the 2000 min and max are not within the 60-80K range you are seeking.

Not likely to be a 10% excise tax on the scenario you describe as long as you don't contribute *before* the beginning of the applicable FY.

[SoCalActuary]

The method works very well. In addition, please note that several major db admin systems allow you to record the undeducted contributions as an input item. They will then adjust to assets under 404 and give the proper plan cost.

[richard]

There is a fly in the ointment.

The client is a cash-basis taxpayer (in Connecticut, if this matters). His accountant has no problem with the contribution in 2000 not being deductible in 1999 (because of the timing of the contribution).

However, he indicates that it cannot be deducted in the corporation's 2000 tax return because it is for a prior year --- 1999 --- and not for 2000.

The fact that cash basis taxpayers can deduct pension contributions accrued at yearend is a specific exception to usual treatment of expenses by cash-basis taxpayers. That's not the issue here. It sounds like the situation here doesn't apparently fall within this exception.

Unless I have a specific cite to the contrary, I prefer not to disagree with the accountant. (So, if you all have some specific cites, I appreciate them.)

(By the way, does it matter if this is an S or C Corp?)

So, in my example, the $35,000 would not be deducted in 1999 or in 2000! Following this logic, it would never be deducted. Would it become part of the basis upon benefit payout? Also, would it be subject to 10% excise tax each year until them?

Thanks.