S-Corp. / Employer Match of 401K

[bbrownatl]

I have a single member LLC S-Corp client that basically distributes out all earnings to her personal account but at year end a salary is paid, an employee contribution to a solo 401k is made and the employer contribution ($10K) is recognized. The actual $10K employer contribution is paid at the time of filing the 1120S in March. Am I correct in thinking that the $10K is deducted now as in 2009 even though not paid until 2010? The S-Corp is on the cash basis of accounting so this seems somewhat backwards, thus my reason for asking.

Other issue is that the equity balance goes negative at 12/31/09 since she distributes out all the money but then puts the $10K back in during March (2010) just prior to the employer contribution. My thought is that she needs to at least have that $10K in there at 12/31 so that equity does not go negative and trigger anything else.

Any clarification appreciated.

As always, much thanks.

Merry Christmas & Happy Hanukkah,

Brian

[JCH]

For the first question, the answer is yes. Even though the corp is on cash basis, employer match can be made to 401(k) in 2010 and deducted in 2009. There's a cite for this, but I don't have it at hand. I have a client with the exact same scenario.

[Nashville]

And the second answer is...

...it depends.

The negative retained earnings problem can be rectified by observing the accrual method of accounting. This can be done even though the cash method is in place for taxes.

The negative retained earnings cannot, of course, be solved if the corporation is really losing money. But simple timing issues attributable to the relevant time period can be solved with typical accruals and deferrals.

If the client elects to have his books on accrual and his taxes on cash, this is very common. The differences should be kept perpetually every year, and if over the dollar threshholds, they become items for the M-1 reconciliation.

The first question has been answered, but I will confirm that the 401(k) procedures are O.K., although somewhat awkward, and in my opinion, ill-advised.

[BOB W]

A 401KPlan that has employees (Not a sole plan) is required to pay withholdings by the end of the following month. Whether that applies to a Sole 401K I don't know.

Negative Capital due to excess distributions should trigger extra income to the shareholder. When doing the basis worksheet, it would develop for you the additional income to the shareholder.

There is no good reason for your client to withdraw all money from the account as it does not reduce their income, only business expenses will do that.