Deferred Comp / Business Owners

[austin3515]

i get this question all the time.  johnny owns 100% of his business and is looking for more deductions.  He wants to look into a Deferred Comp plan for himself.

I realize that there is no value in it for him, especially in a pass-through entity, but I am looking for an article from a large accounting firm or ERISA firm that explains either why it makes no sense and/or might give some reasons as to why it might in fact make sense in certain limited scenarios.

Any help appreciated!

[Larry Starr]

This is so simple; if he owns the business, all a "deferred comp" plan does is promise that his right pants pocket is going to pay something to his left pants pocket!  "We don't need no steenkin' badges .... er.. large accounting firm missive" to make that situation clear.

A deferred comp from the owner to himself is a waste of time and effort.  A deferred comp agreement's value is where someone is promising the recipient money FROM THEM to the recipient in exchange for something.  In the case of the owner, IT'S ALREADY HIS MONEY.

If it's someone else's money (like a partner), then that is a different situation.

And as to "more deductions", if he's a pass through entity, it's already in his personal tax return; there is no "bigger deduction" at all.

Did he run this by his accountant, who will tell him exactly the same thing, which is that it is a stupid idea! :-)

 

[david rigby]

Owner should contact an actuary.

[Larry Starr]

15 hours ago, david rigby said:

Owner should contact an actuary.

Or a funeral director; just as much logic. What on earth do actuaries have to do with deferred compensation agreements? When they make sense, they are most often legal documents drafted by qualified and knowledgeable attorneys.

[david rigby]

Owner wants to defer something.  Perhaps a DB plan can help.

[XTitan]

30 minutes ago, david rigby said:

Perhaps a DB plan can help.

True, but anything beyond the qualified plan limits is still just moving cash from one pocket to the other.

[austin3515]

Larry, I know everything you just said, but I figure a tax expert might be the best person to comment on why there is no tax value in this. 

And I can;t see either how a DB plan helps, I mean if they wanted to give contributions to employees, this wouldn't be the direction of the conversation.

[jpod]

Austin, you are not likely to find anything because it's kinda "Tax 101" that it would never make sense, isn't it?

[austin3515]

I get the question 3 or 4 times a year, so I would have assumed that someone would take the time to write something up to explain it. People are always googling deferred compensation plans, and there are tons of articles.  I would expect one of them would say "but it doesnt make sense if you are the 100% owner because of a) b) and c)."

Lord knows there are thousands of 101 level articles on all topics 401k.

[Larry Starr]

3 hours ago, austin3515 said:

Larry, I know everything you just said, but I figure a tax expert might be the best person to comment on why there is no tax value in this. 

And I can;t see either how a DB plan helps, I mean if they wanted to give contributions to employees, this wouldn't be the direction of the conversation.

Um.... I am a tax expert.  I am an Enrolled Agent; same as a CPA except I can't do audits.  Tell him I said so!!!! :-)

[austin3515]

Message boards just don;t have the same credibility.  All sorts of weirdos out there writing under aliases and everything (how trustworthy is that!)  For all I know Dr. Evil hacked into your account is just impersonating a tax expert! 

[Larry Starr]

OK; feel free to have him call me! :-)

And, that's why my NAME (and not some alias) is always on my responses.

[austin3515]

Imagine the honor of having Austin Powers as a referral source...  Even I would be proud!