S Corp Profit Sharing Disguised Dividends

[austin3515]

A CPA has suggested that we need to be careful allocating profit sharing to owners in proportion to their ownership for S Corps.

So for example, assume Owner A owns 70% and Owner B owns 30% of an S Corp. IF we do $7,000 of profit sharing for A and $3,000 for B, the IRS might suggest (according to this CPA) that this is a disguised dividend of some kind.

My proposed response was "So you're telling me every 50/50 S-Corp that is giving the two owners the same profit sharing has a problem?" But then I realized that that wasn't a good argument because it was being allocated based on compensation and not ownership (or at least a per capita allocation if comp was different). In my scheme, the profit sharing is being allocated based on solely ownership.

So I need to do my due diligence here. Anyone see a problem?

[Belgarath]

Is the plan set up for general testing with everyone in their own group? If so, the required nondiscrimination testing is based upon their Plan compensation, and not ownership, but as long as it passes the testing, I don't see any problem.

I'll be honest - I've never heard of this "disguised dividend" argument, and I don't quite understand how it makes any sense - you can only use W-2 compensation for plan purposes, so an employer discretionary contribution that passes testing based upon that W-2 compensation seems fine - seems like quite a stretch to call that a "dividend."

I'll be interested to see if anyone else has run across this. Seems a little paranoid to me.

[austin3515]

If I had to respond that this was an integrated allocation plan I would be so humiliated I might never post again . So everyone is in their own group and of course all testing passes.