Non-deductible contributions

[Guest flogger]

A sole-participant sole-proprietor has a DB plan with a required contribution of $51,000 for PYE 12/31/2004. His net Schedule C income for 2004 is $0. Therefore, he cannot deduct the $51,000, and is exempt from the non-deductible contribution penalty.

For PYE 12/31/2005 his net Sch C income is also $0. His contribution requirement for 2005 is $0.

Can he ever deduct the $51,000 he made for PYE 12/31/2004?

Since his net Sch C for 2004 is $0, the $51,000 contribution came from after-tax income earned in a previous period. If he can neither deduct nor return the $51,000, must he pay taxes on this amount (again) when it is distributed to him as a benefit?

[Blinky the 3-eyed Fish]

He can deduct it in a future year when there is a difference between the minimum required and maximum deductible contribution. Because of the new PPA max deduction up to 150% of CL, this is most likely to occur in any future year in which he has enough earned income to sustain the deduction. For example, assuming he has plenty of earned income in 2006, let's say his minimum is $100,000 and his maximum deductible is $200,000. Well, he could contribute up to $149,000 but deduct the full $200,000.

To answer your second question, yes, it is taxable to him despite the fact it was never deducted. There are prior board discussions on this question.