Year-end tax planning FAQsBlog added by Nicholas Paleveda MBA J.D. LL.M on December 10, 2013
Nick Paleveda MBA J.D. LL.M

Nicholas Paleveda MBA J.D. LL.M

Sanford, NC

Joined: March 27, 2012

​Most professionals do not know that you have until the end of the year to set up a plan, and then you have until you file your tax return to fund the plan — including extensions. Imagine that a client will need a $100,000 deduction in 2013. The company establishes a plan on December 31, 2013. The company will have until September 15, 2014 to fund the plan and provide the benefits.

Get the paperwork in by December 31st:

Pension trust
Tax ID
Corporate resolution

Fund by September 15th:

Annuity applications and check to insurance company
Life application and check to insurance company

What about after December 31st?

It is too late. After December 31st, the plan options go down to perhaps one — a simplified employee pension (SEP) — and everything is taken off the table. Pensions can provide tax-deductible contributions in excess of $51,000. For the business owner and professional, this can be a great benefit.

What happens if the corporation has to borrow the money to fund the plan?

Actually, with the high tax rates and low borrowing rates, this is not a bad option. Lets say your deduction is $100,000 and your tax bracket is 35 percent. Your company would receive a refund of $35,000. And let's say you borrowed $100,000 to fund the plan at 8 percent. Your cost of funds is $8,000. Taxes minus cost equals a $27,000 net gain.

Can you set up a plan on December 31st and have the deduction for the entire year?

The answer is yes. The plan may be made retroactively effective to January 1st.

What happens if I have a partnership as opposed to a corporation?

Partnerships may have a plan, but according to Commissioner v. Peterson, U.S. Tax Court docket 16263-11,2068-12 November 25, 2013: "A partnership activity does not constitute a trade or business unless the partnership engages in the activity with the predominant purpose and intention of making a profit."

Can you set up the plan on January 1st and backdate the document?

The answer is no, and you will lose your license.

Pensions are a place where you should work with a tax advisor or a competent team of advisors. Many decisions by the tax court are "facts and circumstances." Make sure the facts line up in your favor when setting up a plan.

See also:

Strategies to maximize the year-end exemption windfall

Year-end tax planning for 2013: introduction

Year-end income tax reduction strategies: the good, bad and ugly
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