Cash Balance Contribution Deduction

[Catch22PGM]

Single-member LLC that has elected to file as S-Corp has a cash balance plan that covers the owner and a handful of employees.  The contribution for the 2021 plan year was deposited on March 10, 2022.  The deposit was for the recommended contribution calculated by the actuary.  The CPA who is preparing the tax returns for the business is telling the owner that the contribution applicable to the owner's benefit cannot be deducted for 2021 and must instead be reported on the 2022 tax returns.  The returns are otherwise being completed on an accrual basis.

I am neither a CPA nor an actuary, but I've been a TPA for a long time and I've never heard of this.  I didn't even bother asking how the CPA determined the portion applicable to the owner.  Is there a rule preventing the business from taking a tax deduction for the portion of the accrued cash balance contribution that is applicable to the owner's benefit?

[Calavera]

If this CPA really thinks that it cannot be deducted for 2021, your client may need another CPA.

[Jakyasar]

ERISA Online Book (EOB), Chapter 7, Section XVI, part E - Timing of Contributions has a well written explanation (not sure if I am allowed to copy the language here).

Otherwise, I agree with Calavera

[Catch22PGM]

Quick update - my client's CPA is holding his ground and sent this link as his back-up. https://www.irs.gov/retirement-plans/an-s-corporation-cannot-deduct-accrued-expenses-for-related-parties  I've told my client that the language in this link supports what I've been saying and that the key is "accrued compensation" - that has nothing to do with the retirement plan contributions.  I gave my client the advice from Calavara:

23 hours ago, Calavera said:

If this CPA really thinks that it cannot be deducted for 2021, your client may need another CPA.

 

[Mike Preston]

May?

[Bird]

It's one thing to be a voice in the wilderness when you're right. Quite another to be so terribly wrong. Basically, he's the only person in the world that thinks that way.

[Peter Gulia]

Just curious, if the employer adopts the CPA’s tax-return preparation, does it affect anything in the pension plan’s administration or the actuary’s valuations?

[Nate S]

22 hours ago, Catch22PGM said:

Quick update - my client's CPA is holding his ground and sent this link as his back-up. https://www.irs.gov/retirement-plans/an-s-corporation-cannot-deduct-accrued-expenses-for-related-parties  I've told my client that the language in this link supports what I've been saying and that the key is "accrued compensation" - that has nothing to do with the retirement plan contributions.  I gave my client the advice from Calavara:

 

Ditto on the new CPA.

Although he may be entirely wrong, that link includes the remark, "The S corporation also can’t deduct any plan contributions for these participants that are based on accrued compensation."  So is the CPA also not disclosing that he incorrectly calculated the compensation using accrued income???

You could also recommend seeking mediation through the AICPA:  Ethics hotline: 1-888-777-7077

14 hours ago, Peter Gulia said:

Just curious, if the employer adopts the CPA’s tax-return preparation, does it affect anything in the pension plan’s administration or the actuary’s valuations?

Typically the contributions on the SB are going to be matched to the deductibles for the year; but in this case the actuary may be another accredited opinion to influence the CPA; he could also threaten to match the SB to the undetected amounts, but include a dissenting opinion naming the CPA as being at fault.(as long as there wasn't a funding deficiency as a result)

But regardless the Employer has final say on his own tax return, all efforts should be shown towards influencing him to get it prepared properly.

[Dare Johnson]

I am a CPA and I think the other CPA is wrong.  The Code Section the other CPA is referencing means that an accrual based taxpayer (the company) cannot deduct accrued items payable to a cash basis taxpayer (the owner) if they are related as this would result in deferring taxes to a future year.

Retirement plan contributions are one of the few deductions that even a cash-basis taxpayer can accrue and deduct.

Usually the issue with S-corps and cash balance plans is the owner might not have tax basis to take an accrued contribution so they wind up with a suspended loss until the following year.