From: "Gene E. Utterback, EA" 
Newsgroups: misc.invest.financial-plan
Subject: profit sharing calculation
Date: 7 Jun 2004 18:35:01 GMT
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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