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Schedule C Negative but 401k already funded


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I'm trying to find something that is written by the IRS or perhaps a prestigious law firm that talks about the proper treatment when a schedule C proprietor has negative self-employment income but has already funded his or her simple IRA contribution.

Does anybody have such a resource? My assumption is the contributions are refunded, adjusted for gains.  Because the deduction will not be taken in 2020, my assumption is that solely the investment earnings will be taxable in the year distributed. But I would still like to find something written on the topic in a formal way that  I can provide to a CPA I work with.

Austin Powers, CPA, QPA, ERPA

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How about relying on this though from the EOB.  It appears to only relate to 401ks/PS but it seems to be pretty on point...

"9. IRS permitted return of “excess” contributions due to errors made in computing earned income. In PLR 200639003, a limited liability partnership encountered a number of errors made with respect to the LLP’s accounting, as a result of a change in accounting systems, including: (1) overstatement of certain income, (2) treatment of certain non-billable costs as billable, (3) double inclusion of certain advances, (4) certain income understated as a result of a failure to implement certain accounting changes, and (5) certain income that was reported not being supported by journal entries. The net result of these errors was that the LLP’s income was overstated. As a result, the earned income of the equity partners was overstated, resulting in excess profit sharing contributions made to their accounts. The IRS ruled that the profit sharing contributions made with respect to the overstated income were made as a result of a mistake of fact. Therefore, the plan could return the excess contributions to the employer without violating the exclusive benefit rule"

Austin Powers, CPA, QPA, ERPA

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