Sole proprietor non-deductible contributions

[SoCalActuary]

This is probably an old topic, but...

A sole proprietor contributes to a DB plan enough for minimum funding, but more

than their net schedule c income. The excess is not deductible in the year funded,

which happens to be before year end. The amount would be otherwise deductible

to meet minimum 412 funding.

No penalty applies. But when does the contribution become deductible?

Do we continue to carry the non-deductible portion as an offset to plan assets

for purposes of 404 funding rules? (My belief is that we do carry forward the

non-deducted amount.) Does this become a part of non-taxable basis in the contract if the participant closes the account before the deduction is credited?

[david rigby]

I don't pretend to have any expertise in the area of sole proprietors, but this is from the 1999 GrayBook:

QUESTION 99-13

Funding: Deduction Limit for Self-Employed

A contribution is made to satisfy the minimum funding requirement. Due to net business losses, the contribution cannot be deducted because of 404(a)(8)©, which says contributions fail to satisfy the 162 and 212 requirement if they exceed earned income.

Can the deductions be carried over to future years? Can they be deducted up to the earned income limit in each succeeding year as contributions required to meet the minimum funding requirement of a prior plan year, or would a ten-year amortization rule be used?

RESPONSE

The statute does not appear to accommodate a carryover of the 404(a)(8)© limit to later tax years. Section 4972©(4) exempts such amounts from the 10% excise tax on nondeductible contributions.

Copyright © 1999, Enrolled Actuaries Meeting

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[SoCalActuary]

Thanks for the Gray Book response.

Did the IRS consider 1.404(a)-14(d)(2)(i) not to apply?

The Pension Answer Book says this section justified that actuarial assets are reduced for the plan contributions that were not deducted.

It would seem to me that the excess contribution not deducted has to be tracked until it is paid or deducted. In addition, I see non-deducted contributions by a sole proprietor as tax basis under IRC 72.

[Blinky the 3-eyed Fish]

SoCal, I agree with your assessment in your last paragraph. I think this is one example of taking the Gray Book answers with a grain of salt, as I don't see a justification for the answer given.