Where to Deduct on Tax Return

[rblum50]

I just want to be sure where the following plan deductions would be taken on a corporation's tax return. I have a Limited Liability Corporation being taxed as a sole proprietorship. This corporation has a 401(k) plan as well as a Cash balance Defined Benefit plan. Please indicate where the following deductions would be taken; either on line 28 on the front of the 1040 or on line 19 of the Schedule C:

With regard to the 401(k) Plan:

Owners Salary Deferral

Owners Safe Harbor Match

Owners Discretionary Contribution

Non-Owners Salary Deferrals

Non-Owners Safe Harbor Match

Non-Owners Discretionary Contribution

With regard to the Defined Benefit Plan:

Defined Benefit Plan Contribution (and I would assume this answer wouldn't change whether the Plan is a Cash Balance Plan or not).

This case I am working has included and excluded different categories of contributions on the Schedule C each year since 2006. I just want to make sure the the proper deeductions have been taken in the proper places. When I spoke to the CPA, she didn't have a clue (some CPA!).

Thanks

[ETA Consulting LLC]

Since the business is not incorporated, all NON-owner contributions will be deducted on the Schedule C with other business expenses. Then, you would calculate the self-employment taxes on the Schedule C income. The Schedule C income will be reduced by 1/2 of those self employment taxes. You will then engage in the circular calculation with respect to the owner's "company contribuitons"....... (you know this story).

All OWNER contribution deductions will be taken on the 1040 (this includes deferrals and employer contributions). It may appear as if they are all one-type on the actual tax form, but are different from a plan recordkeeping perspective (meaning that you must ensure the appropriate distribution restrictions apply to each source of funds within the plan).

Good Luck!

[rblum50]

Since the business is not incorporated, all NON-owner contributions will be deducted on the Schedule C with other business expenses. Then, you would calculate the self-employment taxes on the Schedule C income. The Schedule C income will be reduced by 1/2 of those self employment taxes. You will then engage in the circular calculation with respect to the owner's "company contribuitons"....... (you know this story).

All OWNER contribution deductions will be taken on the 1040 (this includes deferrals and employer contributions). It may appear as if they are all one-type on the actual tax form, but are different from a plan recordkeeping perspective (meaning that you must ensure the appropriate distribution restrictions apply to each source of funds within the plan).

Good Luck!

I appreciate the quick and informative response that you have provided to me. Can I also assume the any deductions to a defined benefit plan will always be taken on the 1040? The "CPA" I mentioned took the non-owner DB portion (Cash Balance Plan) and showed it on the Schedule C. Also, do the owner and non-owner 401(k) salary deferrals appear on a separate line anywhere? The CPA, for some reason I can't fathom, included the owner's $22,000 salary deferral on the Schedule C.

Thanks again, in advance, for any help you can provide.

Rick

[ETA Consulting LLC]

I appreciate the quick and informative response that you have provided to me. Can I also assume the any deductions to a defined benefit plan will always be taken on the 1040? The "CPA" I mentioned took the non-owner DB portion (Cash Balance Plan) and showed it on the Schedule C. Also, do the owner and non-owner 401(k) salary deferrals appear on a separate line anywhere? The CPA, for some reason I can't fathom, included the owner's $22,000 salary deferral on the Schedule C.

Thanks again, in advance, for any help you can provide.

Rick

As for the Salary Deferrals for the Owner, it should be on the 1040 with all other Owner Contributions to the plan; Never on the Schedule C. I am not aware of any exception for the DB plan either. Hence, when an amount is funded, there should be a determination of what portion of the amount is attributable to that individual owner. He would take that deduction on the 1040 with all other "OWNER" contributions.

A deferral should never be posted on the Schedule C for the Owner, but on the 1040 with any other contribution for the owner. Keep in mind that this is an issue when the entity is not taxed as a corporation.

Good Luck!

[masteff]

IRS Pub 565 (page 16, "Where to deduct") agrees w/ what ERISAtoolkit is saying.... non-owner on Sch C and owner on 1040.

[rblum50]

I appreciate the quick and informative response that you have provided to me. Can I also assume the any deductions to a defined benefit plan will always be taken on the 1040? The "CPA" I mentioned took the non-owner DB portion (Cash Balance Plan) and showed it on the Schedule C. Also, do the owner and non-owner 401(k) salary deferrals appear on a separate line anywhere? The CPA, for some reason I can't fathom, included the owner's $22,000 salary deferral on the Schedule C.

Thanks again, in advance, for any help you can provide.

Rick

As for the Salary Deferrals for the Owner, it should be on the 1040 with all other Owner Contributions to the plan; Never on the Schedule C. I am not aware of any exception for the DB plan either. Hence, when an amount is funded, there should be a determination of what portion of the amount is attributable to that individual owner. He would take that deduction on the 1040 with all other "OWNER" contributions.

A deferral should never be posted on the Schedule C for the Owner, but on the 1040 with any other contribution for the owner. Keep in mind that this is an issue when the entity is not taxed as a corporation.

Good Luck!

Again, thanks for the information. Final clarification - it was my impression that since a DB plan is not an individual account plan, the total contribution shouldn't be "artifically split" between owners and non-owners. Therefore, the total DB contribution should always be shown on the 1040 with no portion being shown on the Schedule C. Am I right on this?

Thanks again,

Rick

[ETA Consulting LLC]

Again, thanks for the information. Final clarification - it was my impression that since a DB plan is not an individual account plan, the total contribution shouldn't be "artifically split" between owners and non-owners. Therefore, the total DB contribution should always be shown on the 1040 with no portion being shown on the Schedule C. Am I right on this?

Thanks again,

Rick

You make a valid point with respect to the fact that a DB plan is not an individual account plan. And, it does seem rather odd that an actual split is done. But, to your other note, if they were not split, then the entire amount should be deducted as a business expense on the Schedule C; not on the front of the 1040. As a first rule, the retirement contributions are a deductible 'business' expense. The owner's portion being deducted directly on the 1040 instead of the Schedule C is like the exception to the general rule. At any rate, it's a moot point, because the deduction for the owner is split.

Hope this helps add a little perspective for you.

Good Luck!

[Lou S.]

I appreciate the quick and informative response that you have provided to me. Can I also assume the any deductions to a defined benefit plan will always be taken on the 1040? The "CPA" I mentioned took the non-owner DB portion (Cash Balance Plan) and showed it on the Schedule C. Also, do the owner and non-owner 401(k) salary deferrals appear on a separate line anywhere? The CPA, for some reason I can't fathom, included the owner's $22,000 salary deferral on the Schedule C.

Thanks again, in advance, for any help you can provide.

Rick

As for the Salary Deferrals for the Owner, it should be on the 1040 with all other Owner Contributions to the plan; Never on the Schedule C. I am not aware of any exception for the DB plan either. Hence, when an amount is funded, there should be a determination of what portion of the amount is attributable to that individual owner. He would take that deduction on the 1040 with all other "OWNER" contributions.

A deferral should never be posted on the Schedule C for the Owner, but on the 1040 with any other contribution for the owner. Keep in mind that this is an issue when the entity is not taxed as a corporation.

Good Luck!

Again, thanks for the information. Final clarification - it was my impression that since a DB plan is not an individual account plan, the total contribution shouldn't be "artifically split" between owners and non-owners. Therefore, the total DB contribution should always be shown on the 1040 with no portion being shown on the Schedule C. Am I right on this?

Thanks again,

Rick

My understanding is the owner's portion gets deducted on the 1040 and employes portion gets deducted on the schedule c. Determining the owners portion can be tricky though and is often the subject of debate as to how that gets allocated.