Xcite Biotechnology Inc Profit Sharing Plan Tax File Memorandum Paper Revise the memo and write the client. the example of memo include the example of clie
Xcite Biotechnology Inc Profit Sharing Plan Tax File Memorandum Paper Revise the memo and write the client. the example of memo include the example of client letter. There are instructions in the following document. March 1 20, 2020
TAX FILE MEMORANDUM
From: Jing Jin
To: Michael
Subject: 401(k) Profit-Sharing Plan
Tax Research Memo
Summary of Facts
Xcite Biotechnology has a 401(k) profit-sharing plan. The employees and owners have
made employee deferrals into the 401(k), and the company plans to match the employee
contributions in February 2020 for those employees who are employed on December 31, 2019.
401(k) profit-sharing plan that allows an employee to defer up to 15% of the W-2 compensation
of employees, including owner-employees. The deferrals are matched at 50% of the deferral up
to 10% of the employee’s compensation. Matching contributions are made only when you are
employed on the last day of the year. The board of directors hopes to provide all employees with
profit-sharing based on the final financial figures and cash position, which is equivalent to 2% to
5% of salary. The contribution of profit distribution will be determined at a board meeting in
March 2020.
Research Issues
Can Xcite Biotechnology Inc. deduct the contribution to the 401k for 2019?
Law and Analysis
Section 162 (a) of IRC generally permits the deduction for all the normal and essential
expenditures remunerated or sustained during the tax year in conducting any trade or corporate.
Limitations on 401(k) plan affect the rate of deductibility. Under code 404 (a), employer
contributions to a profit-sharing plan are deductible (up to the applicable limit) in the taxable
year they are paid into trust. Contributions to a taxable year that are paid no late than the
deadline (with postponements) for the tax yield of that particular year are said to be funded on
the final day of the year for which the contribution was made (Bernheim, Fradkin and Popov,
2015). This means that deductibility for the previous year will be affected by the actions of the
following year. According to Moore and Horner (2014), the main limitation on the profit-sharing
is that the total amount contributed to the plan cannot exceed the lesser of 100% of the
compensation of the contributor or $57, 000 for the 2020 tax year according to section 404 (a).
Ho (2017), asserts that employees deferrals are limited to 100% of their recompense. Geisler
and Hulse (2014), established that the code and the applicable regulations do not spell the
standards of the employer match since it doesnt have any effect towards the limit of 401(k) as
examined in Commr, 429 U.S 569 case in 1977. Based on Williams and later Tax Court case,
the memorandum concluded that;
To be deductible under code 404(a), any contribution from the employee to the profitsharing plan of a tax-qualified plan must be in cash (or its equivalent) or property.
Tax Research Memo
2
Whether those contributions have been paid is determined through an outlay-of-assets
test created by Williams, which said that the actual outlay of, or reduction in, (the
employees) assets.” Also, the plan should have full control and advantage of the
contribution. Therefore the employer will not have significant control over the
contributed assets, and it cannot be subject to a substantial impediment. The
memorandum goes on to give examples showing the two elements of the plan. Among
other things, the case concludes that the contribution of the employer’s promissory note
or its publicly traded debt fails the first element since there is no outlay of, or reduction
in, the employer’s assets.
Therefore under the provisions of this case, the regulations require that contributions to a
401k should be made on the initial day that they can be reasonably separated from the overall
possessions of the owner, but in no occasion late than on the 15th corporate day of the month
ensuing the month in which the contributions of the participant are deducted (Clark, Maki and
Morrill, 2014). Michael is asking a valid question on the timing of the deductibility of bonuses
for 2019. Deductibility of 401 (k) matching contribution is made based on the plan. Tax is not
remitted on matching contributions until you make a withdrawal during retirement (Lu, 2017).
Deferring up to 15% of the W-2 recompense of workers will expose the 401(k) plan to more
issues if the employer makes noncash unrestricted profit-sharing contributions. According to
Morgan (2014), a deferment of a maximum of $19,500 is allowed for under the age of 50 while
Roth contributions are allowed to all retirement plans in 401(k), and 403(b) plans. Workers can
be able to defer paying income tax on as much as $19,000 that they contribute to a 401(k) plan
(Beshears, 2017). Once you attain an age of 50 years, you are eligible to make more catch-up
contributions of not more than$6000 to you 401(k) plan. These catch-ups can be made at any
time during the calendar year in which you will turn 50, even when you are not yet 50 (Arnold,
Ault and Cooper, 2019).
Conclusions
Xcite Biotechnology Inc. will be allowed to carry out deduction to the 401(k) for 2019 if
it conforms to the provisions of IRC 401 (a)(1), and only if offerings are made to the trust by
such boss, or workers, or both, or by alternative boss who is permitted to remove his donations
under section 404 (a). Thus under the limitations of 404 (a), Michael will allow the deduction of
bonuses and employee and company contributions to the 401(k) profit-sharing plan.
Tax Research Memo
3
Reference
Arnold, B. J., Ault, H. J., & Cooper, G. (Eds.). (2019). Comparative income taxation: a
structural analysis. Kluwer Law International BV.
Beshears, J., Choi, J. J., Laibson, D., & Madrian, B. C. (2017). Does front-loading taxation
increase savings? Evidence from Roth 401 (k) introductions. Journal of public
economics, 151, 84-95.
Bernheim, B. D., Fradkin, A., & Popov, I. (2015). The welfare economics of default options in
401 (k) plans. American Economic Review, 105(9), 2798-2837.
Clark, R. L., Maki, J. A., & Morrill, M. S. (2014). Can simple informational nudges increase
employee participation in a 401 (k) plan?. Southern Economic Journal, 80(3), 677-701.
Geisler, G., & Hulse, D. (2014). Traditional Versus Roth 401 (k) Contributions: The Effect of
Employer Matches. Journal of Financial Planning, 27(10), 54-60.
Ho, A. T. (2017). Tax-deferred saving accounts: Heterogeneity and policy reforms. European
Economic Review, 97, 26-41.
Lu, T. J., Mitchell, O. S., Utkus, S. P., & Young, J. A. (2017). Borrowing from the Future? 401
(K) Plan Loans and Loan Defaults. National tax journal, 70(1), 77.
Morgan, P. M. (2014). Revisions to the Pension and Profit Sharing Plans.
MOORE, C. A., & HORNER II, C. T. (2014). Profit-sharing plans as an alternative to ESOPs.
National Center for
Primary source should be the internal revenue code and provisions that would be relevant
Sections 404(a), 404(a)(3), and 404(a)(6) limitations on contributions and timing of contribution
by the due date of tax return and see Rev Ruling 76-28 for clarity
Reg 1.401(k)-1(a)(4)(ii) employee deferrals are treated as employer contributions for purposes
of 404
Section 401(a)(27) allows contributions without regard to profits for a profit sharing plan
Other limits and requirements include and sections 415(c) and 404(j), 402(g) & 414(v),
nondiscrimination 401(k) ADP and 401(m) ACP tests
.But please see review notes for priority:
Review Notes
Tax Research Draft Memo
March 26, 2020
Format:
Memo was set up consistent with the memorandum in the textbook on pages 5-15 and 5-16
o Client letter on pages 5-16 and 5-17
o Most well written memorandums used single space as shown in textbook
TAX FILE MEMORANDUM format
From: Subject etc. See page 5-15 and 5-16
o Memorandum is Page and half long
o Client letter is half a page with facts summarized and communication of your findings
including client salutation and address
Relevant Facts:
7-8 lines with 4-6 sentences
Focused on the facts about the 401k profit sharing plan contributions and related information
o Note: Both the match and profit sharing contributions require employees to be
employed on the last day of the year
Employee information like few employees and 4 owner employees and other employees
employed by contract manufacturing firm
Ranges of compensation and bonus information is ok but less relevant since we are not looking
at deduction for bonus
Do not mention names like Michael, Cameron etc. as they are not relevant to the tax issue
Citations:
Citations of primary sources must be consistent with Exhibit 5.2 on page 5-7
Citations must be consistent throughout the memo e.g. Section; Sec. ; or §: not what you feel at
the moment is correct; so Once form of citation is chosen should be used consistently (e.g. §;
Reg. §; etc.)
Use complete citations (e.g. Sec. 404 use Sec. 404(a)(3)(i)(I) )
Please do not bold your citations
Citations do not include IRC, Internal Revenue Code, and Treasury Regulations etc. Only
exception is the first time you use a citation (e.g. Section 404(a) of the Internal Revenue Code at
the beginning of the memorandum) but throughout the rest of the memorandum back to just
Section 404(a)(3)(i)
Be complete on citations
I may have used in my notes 404(a)(3); please be complete and go
404(a)(3)(i)
Readability of Analysis:
Build the technical story: weave a combination of quoting the Code section and paraphrasing
the section or regulations. To weave the story properly, you need to know and understand the
section or regulations- may require you to look at a secondary source to understandThe technical story must be sequenced and in order so do not stop in the middle of a thought
and move on to another topic and come back to the earlier thought
Analysis should be 5-7 paragraph and not just 1 or 2 paragraph to conserve space
DO NOT QUOTE or cut and paste secondary sources into the memo; it is only primary sources.
Your references (citations) are right in the memo as you write. No footnotes
No names such as Michael, Cameron etc.
Please do not cut and paste my notes from here or other materials. Write your own work!
Be careful putting conclusion observations in the analysis
An underline and question mark on the side usually mean we do not understand or we have a
question about the accuracy of the statement or comment
Technical analysis with specifics on deductibility
Please note: IR-2018-211, Notice 2018-83: This notice provides the 2019 amounts impacted by the CPI
for plan limits; so wherever you see a numerical limitation; it is typically indexed by the CPI (e.g. 15,000
is 19,000 for 2019).
Please note: Some of the memos discussed the simple 401(k)plan under §401(k)(12) regarding the
3% employee deferral and 100% matching; or the Alternative Method with Required contributions
regarding a automatic deferral of 3% with 100% match under §401(k)(13).
Unfortunately, XCite did not elect to choose this approach and design a traditional 401(k) plan.
Therefore, XCite does not have these types of plans. Further, it is not available to be changed since our
plan already provides for 50% match up to a 10% deferral. The simple or automatic plan is not available
to us in 2019 and possibly not in 2020 since employees have already deferred money under the existing
terms of the plan and changing the deferral and match based on what they signed up for for 2019 and
continued into 2020.
Therefore, Xcite will need to rely on passing the regular ADP and ACP nondiscrimination testing un
§401(k)(3)(A) and §401(m)(2) . This does not preclude you from mentioning the Simple plan in the
conclusion- it would eliminate testing but it would change the match and possibly limit the
encouragement of deferrals based on 50% up to 10% of compensation deferred versus 100% on 3%
deferrals.
Technical analysis on deductibility of contributions and limits on deduction: should be 2-3
paragraphs This is your main argument on deductibility
? §404(a) contributions made to a profit sharing plans are deductible subject
however to limitations
? §404(a)(3)(A)(i) limits the employer contributions to the plan to the greater of
25% of compensation of participants or required contributions under Sec.
401(k)(11). The excess may be carried over to next tax year
? §404(a)(6) provides that contributions are deductible in the year paid unless
made by the due date of the tax return (including extensions thereon) and were
on account of the tax year.
? Reg. 1.401(k)-1(a)(4)(ii) provides that employee elective contributions are
treated as employer contributions for purposes of §404.
? Rev. Rul. 76-28 (1976-2 CB 106) defines the requirements of on account of for
purposes of the matching and profit sharing contributions to be made in 2018
? §401(a)(27) provides that contributions do not need to be made from profits
Technical analysis on limitations should be 2 paragraphs
Limits that have potential to trigger:
? §415(c)(3) limits annual additions to a participants account to lesser of 100% of
compensation or $56,000 and increased to $60,000 including the $6,000 catch
up under §414 associated with §402(g)
This is likely to impact highly compensated owner employees who are
maximizing deferrals
Get the CPI index amounts of $56,000 and $62,000 not the 40,000 in the
Section
? §404(j)(1) there is not a deduction for amounts in excess of §415(c)(3)
? §402(g)(1)(B) provides an annual deferral limit of 19,000 and a catch up of 6,000
under §414(v)(B)(2) for over 50 years of age
? Reg. 1.401(k)-1(a)(4)(ii) provides that employee elective contributions are
treated as employer contributions for purposes of §404.
Other limits that have some applicability that should be mentioned generally but the
balance is not all the details. This writing talent to write this part. Dont go to deep
here.
? Nondiscrimination rules of §401(k(3)(A) ADP tests and §401(m)(2) ACP tests;
they are identical tests- but different contributions in the test- employee
deferrals and employer matching contributions
? Annual compensation limit of 280,000 under §401(a)(17) for retirement plan
purposes including 401(k) profit sharing plans
? Rev. Rul. 90-105 (1990-2 CB 69) deals with employee deferrals on potential
unearned bonuses. Xcite has unearned substantial bonuses that may be decided
by the board in March- likely to be paid later in 2018 when certain milestones
are met and cash is available
In the end, you may have to make choices about what you cover but start at the bottom and work
up if your analysis is to long for the memo
Conclusion:
Be direct specific, succinct and complete but brief.
Writing has to be not technical
No citations
No names such as Cameron or Michael
This takes writing talent to write this conclusion that capture the following in 1-2 paragraphs
o Contributions paid to the qualified profit sharing plan are deductible subject however to
limitations on the employers contributions to all employees and annual addition limits on
participant contributions and forfeitures to their accounts
o Total contributions are subject to a limitation of 25% of compensation paid to
participants during the year where compensation is limited to $280,000 for any participant
o The contributions must be paid to the plan during the tax year; if any contributions are
made after the year end; the contribution must be made by the due date of the tax return
including any extensions and must be made on account of the tax year.
o The contributions made on behalf of an individual participant may not exceed the lesser
of 100% of compensation or $56,000 or $62000 if you are over 50
o There are also other plan limitations and requirements that must be continuously met
including nondiscrimination rules, and annual deferral limits
Underline and question marks on the side usually mean we do not understand or we have a
question about the accuracy of the statement or comment
Now the challenge is keeping all of this to 1 and ½ pages
o This requires you to re-write if it comes out longer and make professional judgement to
what may come out; memorandums typically have more than what can be included
Client letter:
Client letter has two parts
abbreviated restatement of the most relevant facts and
restatement in of the conclusion in a simplified context for the nontechnical reader
o Letter should be 2-3 paragraphs; the best letters have been 3 paragraphs
o Be specific, succinct and clear in summarizing the findings (See notes on the Conclusion)
o Cover all of the issues
Client letter summarizes your findings in the memo in a nontechnical manner similar but even
less technical to what is written in the conclusion
Address to:
Mr. Cameron J. Ortiz
XCite Biotechnology, Inc
2400 University Boulevard, Suite 300
Tempe AZ 85284
Must stay with ½ page in writing.
o This requires you to re-write if it comes out longer
ALL MATERIALS ARE POSTED IN THE TAX RESEARCH FOLDER
Also make sure your name is on the memorandum and client letter
Background for Tax Research ProjectWritten Facts
February 6, 2020
Due April 2, 2020 (Draft due March 19, 2020)
Michael, your friend from ASU is started his new job at XCite Biotechnology, Inc in November, 2019.
He called you on a quick matter. His company is a new company backed by several angel investors.
They have just a small number of full time employees and four principals or owners. It is off to a
great start and one of their medical devices is in an FDA trial in the early stage. The company is
considered successful based on recent early stage trials and FDA discussions about their line-up of
medical device products. There are also discussions and interest with biotech venture capital firms
about their medical device products.
Michael is the financial accountant, tax accountant and IT person; (or all around get it done person)
and he and the office manager do everything else not done by the primary principals and the
corporate development person. Michael is scheduled to be paid $55,000 of gross pay per year that
translates to $2115.38 of gross pay per payroll period over 26 pay periods. The office manager has
only been there couple of months before Michael joined. The office manager makes a little more than
Michael. Both are also scheduled to receive a year-end bonus of $10,000. This is the target amount
of bonuses. In other words, the bonus amounts for Michael and Office Manager could be zero to
$20,000. He also understands that the principals who are owner-employees earn $150,000 per year
and can make up to $200,000 of bonus and the business and corporate development executive can
earn up to $100,000 of bonus. All other individuals at the company work for an outside engineering
and technology contracting firm and are not employees of XCite Biotechnology, Inc.
The employees and owners will not know the final bonus until after year end when the financial
statements are complete and the March board meeting is conducted. He understands it takes about 2
months to 2 and ½ months to get this effort complete and checks issued to employees and owners for
their bonuses if any. Furthermore, the Company has some significant Q1 cash requirements that may
prevent it from paying bonuses.
Being the astute person, Michael asks the office manager about his bonus and the other bonuses:
Have they accrued any bonuses for financial statement purposes for yearend of December 31,?
Since we are expecting to have revenues next year and potential taxable income, has anyone looked
into the timing of the deductibility of the bonuses for 2019?
They also have a 401(k) profit sharing plan. The employees and owners have made employee
deferrals into the 401(k) and the company plans to match the employee contributions in February
2020 for those employees who are employed on December 31, 2019. Further, the company is
scheduled to make a discretionary profit sharing con…
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