Profit Sharing Calculation

[Gene E. Utterback, EA]

I am having a rather interesting "discussion" with a
prospective client regarding their company's profit sharing
plan. Here are the facts as I've received them:

Client has an S corporation, formed in 1999;
S Corporation has NEVER had any profit shown on the return;
S Corporation's financial advisor sold them a
"Profit-Sharing" plan back in 2000;
S Corporation's financial advisor has had them contribute to
the profit sharing plan each year since inception - for both
the owners and unrelated employees.

Our discussion revolves around this question "how does one
calculate the employer's contributions for a profit sharing
plan when the company has never had any profits?"

I know IRS Section 401(a)(27)(A) "The determination of
whether the plan under which any contributions are made is a
profit-sharing plan shall be made without regard to current
or accumulated profits of the employer and without regard to
whether the employer is a tax-exempt organization."

I believe that this only enables the establishment of a
profit sharing plan but does not specifically allow
contributions in years the company has no profit.

Any information or guidance would be appreciated.
Thanks,
Gene E. Utterback, EA

 

[Dave Woods]

I am having a rather interesting "discussion" with a
prospective client regarding their company's profit sharing
plan. Here are the facts as I've received them:

Client has an S corporation, formed in 1999;
S Corporation has NEVER had any profit shown on the return;
S Corporation's financial advisor sold them a
"Profit-Sharing" plan back in 2000;
S Corporation's financial advisor has had them contribute to
the profit sharing plan each year since inception - for both
the owners and unrelated employees.

Our discussion revolves around this question "how does one
calculate the employer's contributions for a profit sharing
plan when the company has never had any profits?"

I know IRS Section 401(a)(27)(A) "The determination of
whether the plan under which any contributions are made is a
profit-sharing plan shall be made without regard to current
or accumulated profits of the employer and without regard to
whether the employer is a tax-exempt organization."

I believe that this only enables the establishment of a
profit sharing plan but does not specifically allow
contributions in years the company has no profit.

I read the opposite. It says contributions can be made
without regard to whether there are any profits. It seems
plain to me anyway that contributions can in fact be made.
How do you make them? Well if they do, it simple has to be
based on a formula that doesn't reference profit, i.e. Based
on salary.