How do you make the decision whether to fund your businesses retirement plan? What is being proposed to change business taxation?

By Jeffrey Brooks, CPA, CFP, MBA for Jbrooks Wealth Advisors, PC, a Professional CPA and CFP Firm  602-292-2009  Please consult with your professional tax CPA regarding your specific circumstances!

First I want to discuss what factors play into whether your business should fund your business retirement plan when you have employees!


  1. ABC S Corporation has a 401K profit sharing plan.
  2.  Dr. Jones defers the maximum 401K out of his payroll  of $17,000 for 2012.
  3.  Dr. Jones will not be 50 years old until 2013 so his maximum dollar amount for retirement plan is $50,000 (not $55,500  if Dr. Jones was 50 years of age or older).
  4.  ABC corporation is told by the third party administrators that it can contribute an additional $54K in retirement plan contributions based on a retirement plan census for that includes each employees date of birth, date of hire, date of termination, hours worked and W-2 payroll for the year.
  5. Dr. Jones will get $33K of the $54K which will maximize Dr. Jones $50K allowed.
  6. How should Dr. Jones decide whether to fund the full $54K or not?
  7. A.  Will ABC and Dr. Jones going to be in dire cash flow problems if the retirement plan of $54K is funded? (ABC can fund the retirement plan contribution as late as 9-15-13)  If the answer “yes”, then the decision has been made to not fund the plan.
  8. How much tax  money is being saved by funding the $54K?  In this case it is $20K
  9. How many dollars are given away to the other employees?  In this case it was $21K.
  10. Would Dr. Jones prefer to lose the extra $1K by giving the dollars to the other employees instead of paying the income tax?
  11. Are there employees who are not fully vested who are getting a retirement plan contribution?  Are there employees who only have one year of participation?  If so, it is very possible that these employees will leave BEFORE being fully vested and Dr. Jones will get the non-vested dollars into his retirement plan investment account!!!!
  12. One of my former employers had high turnover with most of his people leaving after around 2 years. These employees were only 20% vested.  My former employer received most of the forfeitures of 80% of the dollars because his account balance was the largest!

On another topic, there are some new small business tax changes being proposed per this Reuters article below:




WASHINGTON, March 11 (Reuters) – The top tax law writer in the U.S. House of Representatives will pitch a plan to revamp the taxation of many small businesses, and some large ones on Tuesday in his latest bid to rewrite the tax code.

Dave Camp, chairman of the House Ways and Means Committee, has said he wants to pass tax reform legislation this year. But the Michigan Republican faces an uphill climb with his party and the Democrats deeply split on tax-and-spending policies.

Camp’s plan, not yet released, will seek to overhaul small business taxes, but also cover businesses not organized as traditional corporations, often known as “pass-throughs.”

These businesses include structures such as partnerships, in which profits are not retained by the business or distributed to corporate shareholders, but rather, are passed through to the partners, who are taxed on that income. The top U.S. income tax rate since the beginning of the year is 39.6 percent.

That is higher, by contrast, than the top corporate income tax rate of 35 percent, though many large corporations do not pay that rate thanks to tax breaks for selected industries.

Pass-throughs range from Mom-and-Pop storefronts to global hedge funds and law firms. About 53 percent of the $1.3 trillion in total business income in this category will be reported in 2013 on returns of taxpayers earning at least $200,000, according to the nonpartisan congressional Joint Committee on Taxation.

The two parties have sparred over small business taxes. Republicans steadfastly oppose higher rates on wealthier individuals, whom Republicans call job creators. Obama and most other Democrats repeatedly have proposed raising the top tax rates paid by the wealthy.

The Democrats won a key round in this fight in January with a deal ending the ‘fiscal cliff’ stand-off that raised the top tax rate on individual income above $400,000.

Democrats want more new tax revenue, presenting a major hurdle to fundamental tax reform, given Republicans’ opposition to this, as highlighted in comments by Camp’s Republican counterpart in the Senate on Monday.

“It has become more and more common for my friends on the other side of the aisle to argue in favor of simply eliminating so-called tax loopholes in order to raise revenue, and then calling that process quote-unquote tax reform,” Orrin Hatch, the top Republican on the Senate Finance Committee said on the Senate floor.

The top Democratic taxwriter, Senator Max Baucus, is also pitching tax reform, but has had disagreements with Senate leaders over the details.

Camp’s draft is likely to include some non-controversial measures, like making permanent a tax break for writing down the cost of equipment for certain business.

The Obama administration has floated the idea of forcing large businesses now taxed as pass-throughs to file as corporations instead, something Republicans have resisted. (Reporting by Kim Dixon; Editing by Leslie Gevirtz)


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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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Phone: 602-292-2009