Question

35. Today is December 15th. ABC Corp, a calendar year company, would like to set up a retirement plan that would allow an income tax deduction for the current year. They are having cash flow problems currently, but expect to have adequate cash flow next May. What would be the best strategy for ABC Company?

A. Set up a SIMPLE plan for this year, and have employee’s make their own contributions, with ABC providing a match next May.

B. Set up a profit sharing plan now, extend their income tax return, and contribute to the plan next May.

C. Extend the income tax return, set up the profit sharing plan next May, and make contributions then.

D. Establish a money purchase plan today, extend their income tax return, and contribute to the plan next May.

Answer 1

Option B is the most suitable option to ABC Corp. Refer explanation below evaluating each proposal.

Option A: This plan is not advisable as it suggests employees to make their own contributions resulting in No Tax Deductions for the current year to ABC Corp as the company can make payments post May. Also, The Simple Plan requires employers to contribute to the fund which is not possible as ABC Corp is facing a cash flow crunch.

Option B: This is the most suitable plan for ABC Corp. The Profit Sharing Plan grants the company an option to contribute to the retirement fund on its own discretion. The company can decide when and how much to contribute to the fund based on its profits. Since ABC Corp is not having adequate cash flows for the current year, it can choose to set up a profit sharing plan now, extend its return of income and contribute to the plan next May. Henceforth, it can claim income tax deduction for current year.

Option C: This is not advisable as the company will have to extend its Income Tax Return. Also, when the company has an option to set up the plan today, then postponing the same will not make it eligible to get a tax deduction for the current year.

Option D: This is not advisable to ABC Corp. Reason being that as per the money purchase plan, the contribution to the retirement fund is fixed and not at the discretion of the company unlike profit sharing plan. As the company is not having adequate cash flows, it cannot make a fixed contribution to the plan today.