Deductible contributions and tax return due date

[Guest Alison Williams]

Can someone help clarify my thinking - I understand that contributions are deductible until the due date of the tax return, including extensions. What if the calendar year corporate tax return was timely filed in March and the TPA subsequently determined a larger contribution could have been made? The additional contribution has not yet been made to the plan. The TPA is advising the client to make the additional contribution prior to 9/15, amend the timely filed tax return and claim the additional deduction. My thought is that becaue the return was timely filed there is no more additional time to make contributions for the prior tax year. Any help out there?

[Mike Preston]

The issue isn't whether the tax return was filed in March. The issue is whether the tax return was on extension until 9/15, even if filed before 3/15.

If it was on extension, there are some that argue that the extension is valid, even if the tax return was filed by 3/15. If you subscribe to that view, then they can indeed do what is being suggested.

If you don't, well, they can't.

The CPA is the one that needs to be consulted with regard to the issue of whether the extension is valid in these circumstances.

[mbozek]

As a deduction matter, the time for making a deductible contribution ends on the date the tax return is filed if there is no request for extension. Therefore Mike is right, no deduction should be allowable for 2001 if an amended return is filed. However, I dont know what the IRS practice is and I guess the client has nothing to lose by filing an amended return (other than the cost of preparing the amended return)and claiming an additional deduction for 2001. If the IRS denies the deduction the client can claim it as a deduction for 2002. However, the client must make the contribution to the plan before filing the amended return.

[MGB]

I've looked into this recently and agree with Mike. It all depends on whether an extension is filed in a timely manner. It makes no difference when the return was filed.

You can file for an extension on Jan 1, and file a return on Jan 2, and take a deduction on the Jan 2 filing for a contribution that is made many months later, as long as it is within the extension period.

[Blinky the 3-eyed Fish]

You also have a situation where the contribution could be considered an includible contribution and deducted in the following year without regard to any limiting factors under 404.

[Mike Preston]

Three points, Blinky. One is that this was a discussion on how to deduct for the prior year, not the current year. Two, includible contributions don't escape 404, they escape 412. That is, if you have an includible contribution of $100 from the prior year and this year's minimum funding is $20, and maximum is $110, the inclusion of the prior year's amount counts against the maximum, but not the minimum. Hence, the maximum contribution for this year would be $20, because $100 + $20 exceeds $110. Fourth, it is only includible if two conditions are met. The primary of which is that it was required for 412 in the prior year, not just that it was allowable under 404. The other one is that it wasn't deductible solely because it was contributed after the 404(a)(6) deadline associated with the prior year.

You probably meant all that with your statement, but I felt it needed clarification for those who aren't as familiar with the regulation.

[AndyH]

Alison, all of these comments are valid, but your original question left some ambiguity as to what "the TPA" was saying.

If he's saying that more needs to be put in my 9/15, then it should be put it regardless of whether it is deductible this year or next.

So, you need to find out exactly whether the client "can" or "must" put in more by 9/15. It sounds to me that the TPA may have given out a wrong number before, and is trying to CYA with the suggestion about an amended tax return.

As discussed here, there's nothing wrong with putting a deposit in after the tax return due date; that just affects the timing of the deduction. The more important thing is to meet minimum funding requirements which for a calendar year is 9/15.

[Blinky the 3-eyed Fish]

Mike, three points. One, I understood the discussion, but was trying to point out another potential option. Two, I did not follow your second point. From Announcement 98-1 1.2.1.1(2) I present the following (there is also a nice example, which I did not include):

"A special rule provides if amounts required under IRC 412 were paid for the preceding year but were not deducted solely because they were not timely paid for IRC 404, they are "includible contributions" and are deductible under the IRC 404(a)(1)(A)(i) rule for the current year. Note, however, that total deductions under IRC 404(a)(1)(A)(i) are subject to the applicable full funding limit."

Third, my post was lacking in information and for that I feel the shame.

[Mike Preston]

I had actually left out the full funding limitation issue. But the point I was trying to make is that the section of 404 you mention is specifically the one relating to 412, not 404. If your funding method has a range, the use of includible contributions serves to compact that range, not leave it as it was. And when the compaction is greater than the spread, it eliminates it entirely. That is, the second year's deduction is then the sum of the prior year's includible contributions and the current year's minimum. That becomes the minimum and the maximum for the second year.

Make more sense?

[Guest Alison Williams]

The plan does have a range in its funding method. The minimum required contribution was made appropriately and deducted on the tax return. The TPA had, in fact, miscalcaulted the maximum available contribution and was trying to cover their backside. Thus, our client could have made a larger contribution if they wished (and they usually do). Our client was not comfortable with the TPA's suggestion and did not take it.

[Guest penman]

So it seems that if you believe the deduction scenario discussed above regarding deducting a plan contribution made after the actual filing of the corporate return as long as there is an extension, then there would be no such thing as an "includible contribution" as defined by Announcement 98-1 if the corporation filed an extension for their prior year tax return because 98-1 says "solely because they were not timely paid for 404". Any contribution paid for the prior year up to the extension deadline would be deductible (timely paid) for that prior year. In other words, they were timely paid for 404, the fact that they were not actually on the tax return seems irrelevant.

For example, say a corporation extended their 2002 calendar year return on March 1, 2003 but filed their tax return by March 15, 2003 without deducting any pension contribution. The 2002 min. funding requirement was made 9/15/2003. Is that contribution an "includible contribution" on the 2003 corporate return? It doesn't seem so because it was in fact timely paid for 404 purposes becuase 9/15/03 is within the extension period.

Please let me know if I'm missing something otherwise the corporate extension would be something to watch out for when trying to deduct what would otherwise have been an "includible contribution".

[Blinky the 3-eyed Fish]

This may be a moot discussion with the overriding unfunded current liability maximum deduction. In this case the assets for this determination would be reduced by the nondeductible contribution, so there may be a good chance that you are able to deduct last year's contribution and this year's. The includible contributions would be limited by the FFL anyway.

[Guest penman]

Blinky, I may be missing your point, if the contribution appeared on the prior year Schedule B, unless you can correctly label it an includible contribution, how can you deduct it in a subsequent year, regardless of what the subsequent year 404 limit is?

Regarding the FFL, I guess that could be an issue but as the FFL for 404 gets adjusted for undeducted contributions, hopefully that would create enough room to allow the includable contribution in the current years deduction.

Am I making a mountain out of a molehill? The includible contribution can be a helpful option but if its use is nullified because of a corporate extension, as I said, that is something to watch out for. I guess even if my logic is correct, it is still sort of a grey area because, as I understand it, the issue of deducting a contribution on a corporate tax return filed prior to making the contribution provided there is a corporate extention seems to be kind of a grey area among practitioners.

[Blinky the 3-eyed Fish]

This doesn't come up too often, so I may be wrong. My understanding is that labeling a missed contribution an includible contribution is not the only way to deduct a contribution made but not yet deducted. Rather, it is a mechanism to deduct a contribution that would otherwise not be deductible because of the maximum deductible limits.

I think back to some the plans that were part of the small plan audits years ago. An example client of ours had contributions that were disallowed and the plan was left with a nondeductible contribution. They were then able to deduct that contribution in following years where there was a spread between the minimum and maximum deduction limits.