deduction limits

[K2retire]

I know that profit sharing contributions deposited after the end of the year but before the due date of the tax return can be deducted in the year of allocation. I think I also remember that they could be deducted in the year of deposit. If you choose to deduct them in the year they are deposited, do you use the allocation year or deposit year to calculate the 25% of pay limit?

[ESOP Guy]

Maybe I am not understanding the question here but....

I have never seen anyone take the position you can deduct a contribution in the current year and allocate them in the prior year.

For example:

You can deposit a contribution in 2015 and as long as it is before the due date of the tax return you can call it a 2014 contribution. You would use 2014 compensation for all of it-- allocation, 415 limit, deducible limit....

You can deposit a contribution in 2015 and call it a 2015 contribution. It would be deductible on the 2015 tax return. But you would use the 2015 compensation for everything-- allocation, 415, deducible limit.

You would never deduct it as a 2015 contribution and allocate it as of 2014 using 2014 compensation for any of it.

Willing to be told I am misunderstanding something here but that is my take on the question.

[Lou S.]

I believe it is possible to do what the OP is describing but it's been a long time since I looked it up. Before they changed the deduction rules with PPA there used to be some interesting timing of of DB/DC contributions to maximize both the allocation and deductibility of contributions.

If memory serves the "best" was to do it is to file the taxes return by the non-extended due date (lets say 3/15/16 for corporate tax payer) and make the contribution no more than 30 days. That way you can allocate the contribution to 2015 based on the 2015 pay and limitation year but deduct it on the 2016 tax return. When figuring out the 2016 deductible limit you would use 2016 limitation year pay for determining the 25% limit (assuming no DB/DC combo).

[ESOP Guy]

I believe it is possible to do what the OP is describing but it's been a long time since I looked it up. Before they changed the deduction rules with PPA there used to be some interesting timing of of DB/DC contributions to maximize both the allocation and deductibility of contributions.

If memory serves the "best" was to do it is to file the taxes return by the non-extended due date (lets say 3/15/16 for corporate tax payer) and make the contribution no more than 30 days. That way you can allocate the contribution to 2015 based on the 2015 pay and limitation year but deduct it on the 2016 tax return. When figuring out the 2016 deductible limit you would use 2016 limitation year pay for determining the 25% limit (assuming no DB/DC combo).

Ok I am willing to be told I am wrong. Have to admit I have never seen it done in all my years.

[Mike Preston]

We do it all the time. Not an issue.

[Bill Presson]

We had several clients that were strictly cash based and would always deduct the contribution in the year deposited even if it was allocated in the prior year.

[K2retire]

Lou's description is exactly what I was recalling. Except that I couldn't remember the last sentence.

The underlying issue is that the company was sold in 2016 and the former owner would like to shelter some of that income before terminating the plan. Although he will be paying bonuses to employees in 2016, there won't be much compensation. He'd like to do a 25% profit sharing contribution for both years but deduct all of it in 2016.

[Mike Preston]

Sorry, no can do.