Deductibility of 2 Years of Contributions in One Year

Calendar year client.  Let's say profit sharing contribution for 2017 is $190,000 which they will deposit to the Plan in 2018.  Similar deposit to be made for the 2018 plan year.

Issue is that while they want to make the actual deposit of $190,000 for 2017, they do NOT want to deduct on the 2017 corporate tax return, but rather deduct the 2017 and 2018 on the 2018 return.  They did put the 2017 corporate return on extension, so the thinking of they made it within the ordinary time but filed the return before depositing doesn't work.  What are the issues here (would combined 2017 and 2018 amounts be subject to the 2018 404 25% limit solely on 2018 compensation for example).

My understanding is a corporation cannot deduct a 2017 profit sharing contribution on a 2018 tax return unless the 2017 profit sharing contribution exceeds 25% deductibility. Why does the 190k have to be a 2017 profit sharing contribution?  They could treat the 190k already deposited in 2018 as a 2018 profit sharing contribution and any additional as 2018 as well subject to deductibility limits 

They can apply a contribution as annual additions for 2017 as long as it's made with 30 days after their tax filing deadline.  (415 rules) If so, they could take both contributions as a 2018 deduction, but I believe both amounts would be combined for the 404 calculation on the maximum.

Section 404(a)(6) of the Code puts cash and accrual basis taxpayers on a modified cash method of accounting for retirement plan contributions. It is not optional. If the contribution for a tax year of the employer is contributed in that year or after the end of the year by the deadline (generally, the extended due date of the employer's tax return for the year in question), it is deductible in the tax return of the "for" year. So assuming the employer contributes the 2017 amount by its tax return filing deadline (including extensions) for 2017 (I'm assuming the employer's tax year is same as plan year), the deduction has to be taken on 2017 return. If they contribute it later than that (which may be contrary to the plan document or have other legal or federal income tax implications, which could be negative), they would deduct it in the year they actually contribute it. E.g., if their tax return deadline for 2017 was March 15, 2018 and they obtained an extension to September 15, 2018, and make the 2017 contribution on October 1, 2018, the 2017 contribution would be deductible in 2018. If they made the 2018 contribution on or before their 2018 tax return filing deadline, the 2017 and 2018 contributions would both be deducted in 2018.

I respectfully disagree. The employer has the OPTION to deduct a contribution deposited in 2018 and ALLOCATED for 2017, as a 2017 deduction (if made within the allowable timeframe) but may choose to deduct it in 2018 if so desired.

Although this may not be supported by a strict reading of the statutory language, the IRS interprets it as optional, at least unofficially. I've seen plans get audited where this wasn't even questioned.

The following from the IRS should prove helpful. Seems pretty clearly stated.

https://www.irs.gov/pub/irs-tege/epche903.pdf

47 minutes ago, Belgarath said:

 

The following from the IRS should prove helpful. Seems pretty clearly stated.

https://www.irs.gov/pub/irs-tege/epche903.pdf

Quote

The Service determined in Revenue Ruling 76-28 that in order for contribution payments made after the close of the tax year to be deductible on the prior year’s return, the plan must treat the payments as made for the prior tax year and the employer must either:

Designate in writing to the plan administrator or trustee that the payment is applicable to the prior tax year, or

Deduct the payment on the prior year’s tax return.

In the context of this ruling the word “treat” is synonymous with allocate. Thus, a plan must allocate the contribution as if it were received during the prior tax year. This decision is consistent with TR 1.415-6(b)(7)(ii) which provides that an employer contribution can be treated as an annual addition for a prior plan year if the contribution was paid to the trust no later than 30 days after the IRC 404(a)(6) period expires.

Accordingly, if an employer pays the contribution by the due date for filing his annual tax return and the plan allocates the contribution during the prior tax year and the employer deducts the contribution on the prior year’s tax return, the contribution is deductible.

Theoretically, an employer may determine the amount of any discretionary contributions up to the last day of the IRC 404(a)(6) period. There is no IRS requirement that an employer adopt an amendment or Board of Directors resolution prior to the end of the tax year to establish a liability.

This does not mean that the Employer must allocate a contribution made within the IRC 404(a)(6) period to a prior year nor does it mean that it must deduct a contribution allocated to a prior year on a prior years tax return [emphasis added]

Agree 100%

Similar question has come up for me.  Plan year and plan sponsor tax year end 12/31/2018.  Plan makes 3% SHNEC contributions to satisfy ADP/ACP Test Safe Harbor.

It is my understanding that in order for the contribution to satisfy the Safe Harbor requirements for 2018, the SHNEC must be deposited by 12/31/19 (12 months following safe harbor year).  Plan sponsor won’t get the deduction for 2018 if they wait that long to deposit and they do not want to deduct this on their 2018 tax return.  

They DO want to deduct it on their 2019 tax return.  If I’m reading this thread correctly it sounds like that is permitted.  (Assuming their 2018 AND 2019 safe harbor contributions ((plus any other employer contributions for 2019)) combined do not exceed 25% of 2019 comp)

Is this correct?  

Thanks in advance!

Yes.

Belgarath and RatherBeGolfing, thanks.

Yay.  Thanks

9 hours ago, Luke Bailey said:

Belgarath and RatherBeGolfing, thanks.

Better late than never!