Excess Contributions - taxability

[Guest jpetrancosta]

Facts:

1. Contributions were made to a SEP for the years 2001 and 2000 (this information is coming to our attention today) for a 100% shareholder of an S-Corp who had no W-2 wages.

2. Corporate and personal returns for 2001 AND 2000 have not yet been filed.

3. The broker/SEP Administrator has been notified and will be returning the contributions less lost earnings as excess contributions.

Q1. For 2001, no excise tax will apply since the contributions will be returned before the extended due date of the returns (both corporate and individual) - True?

Q2. For 2000, the excise tax will apply for both years - True?

Q3. Are the excess contributions includible into the employee/owners income? I've read yes, but this doesn't seem to make sense. Since all of the contributions are in excess of the employers deductible limit, we are not taking the deduction on the corporate return, and therefore not passing the deduction on to the owner thru the K-1. If I include the excess contribution in his income, he will be being taxed on money that was never deducted, or is not taking the deduction the same as including it in his income since he is the 100% owner?

[Gary Lesser]

Additional Extensions. If a taxpayer's return has been timely filed without withdrawing the excess contribution, the amount may still be withdrawn without penalty no later than 6 months after the due date of the tax return, excluding extensions. If withdrawn within this period. file an amended return with "Filed pursuant to section 301.9100-2" written at the top of the amended tax return. Report any related earnings on the amended return and include an explanation of the withdrawal. Make any other necessary changes on the return (for example, if the contribution was reported as an excess contribution on the original return, include an amended Form 5329 reflecting that the withdrawn contributions are no longer treated as having been contributed. [Treas Reg Sec 301.9100-2; Instructions for Form 5329, Specific Instructions, Part IV (2001)]

** The 6% tax can be avoided because the individual may remove the adjusted excess before the due date of the 2000 and 2001 tax returns (see additional extension above). [iRC Sections 4973(B)(2), 408(d)(4)] The amount distributed to the individual is not taxable. The loss is not deductible unless (1) no funds remain in the owner's IRA account, and (2) total contributions exceeded total withdrawals.

** The amount contributed should be treated as a distribution to partner on the S Corp K-1.

** The 10% tax on nondeductible contributions would appear to apply for 2000, 2001, and 2002. Nondeductible contributions are determined at the end of the tax year. If the prior years' excesses are removed in 2002, the 2002 penalty could be avoided. [Form 5330]