sole prop and schedule C

[Guest R. Daestrom]

Individual owns 100% of a business, is a sole prop, has no employees, and wants to know the max contribution to make to his profit sharing plan. I have a copy of the Schedule C for 2003, which shows on line 31 net profits. PS contribution not yet entered in the form.

Is the figure shown on line 31 before the reduction for 1/2 of the self employment taxes?

Thanks

[Blinky the 3-eyed Fish]

Yes. Why don't you post your calculation and someone will check it for you?

[Guest R. Daestrom]

Why didn't I think of that?

(1) Line 31 net profits (before PS cont) - $71,745

(2) 164(f) reduction - $5,068.82

(3) $71,745 - $5,068.82 - $66,676.18

(4) $66,676.18 / 1.25 = $13,335.24

$13,335.24 is the max deductible contribution for the year. Does this look good?

[Lame Duck]

That's the way I would calculate it. My only question is why isn't there a 401(k) provision in the plan to allow for additional deferrals.

[Blinky the 3-eyed Fish]

Stickler time - I get line 2 to be 5,068.62 and line 4 has an incorrect formula, but the overall result is close to what I get of $13,335.28.

Back to your first post though, I am not an accountant, but my understanding is that the PS contribution attributable to the sole proprietor will go on the 1040, not the Sch C.

[Guest R. Daestrom]

This was the first year that the owner had enough money to fully fund. A 401k might helpful in future years. Thanks

[Lame Duck]

Actually, I got the same numbers as you, Blinky, but I wasn't going to quibble over twenty cents, since the CPA will round to the nearest dollar, anyway. The deduction is reported on line 30 of Form 1040. Only deductions for employees are reported on the Schedule C.

[Guest R. Daestrom]

I must have added an extra decemal digit or something because I re-calc'd and came up with the same number as Blinky and Lame Duck.

Thanks for the info on where to report this as well. I didn't know that.

[mwyatt]

The comment about the 401(k) feature really doesn't relate to level of profitability, rather the EGTRRA changes to IRC 404 and 415. Adding in the 401(k) component would allow in your example the PS contribution plus the $13,000 deferral and potential $3,000 catchup (assuming your client isn't already in another 401(k) plan). Might want to look into this if it would work (it's not adding any required funding, and might allow your client to literally double what they are limited to, assuming they're not already making 401(k) deferrals in another plan).