New Jersey deduction for self employed individuals

[Bird]

I thought that NJ only allowed deductions for 401(k) contributions for self-employed individuals; i.e. not for profit sharing, match or defined benefit contributions. (I was going to say "always thought..." but honestly didn't think about it until we learned the hard way when a client's deductions were disallowed. It wasn't my problem but the accountant had some 'splaining to do.)

Now I get the following message from an accountant, saying that everything is deductible:

Quote

I always thought [that]  the employer contributions for the owner , which are based on net income and discretionary, were not deductible, only the 401k deferral is deductible for NJ purposes.  The below paragraph was sent to a colleague directly from NJ Taxation Regulatory Services

Any amounts contributed to a 401(k) plan by a sole proprietor on behalf of employees or on his or her behalf as an employee receive tax-deferred treatment and are deductible to the same extent as for federal income tax under N.J.S.A. 54A: 6-21. New Jersey follows the federal contribution limits, and elective deferral, employer match, and profit sharing contribution are all deductible. New Jersey agrees that $64,500 ($58,000 + $6,500) is the correct amount for those 50 and older in the 2021 tax year.

Here is the statute cited: N.J. Stat. § 54A:6-21 (“Gross income shall not include amounts contributed by an employer on behalf of and at the election of an employee to a trust which is part of a qualified cash or deferred arrangement which meets the requirements of Section 401(k) of the 1954 Internal Revenue Code, as amended. N.J.S. § 54A:6-21”)

I thought that there was a different cite, which, when read narrowly, didn't permit self-employed individuals to deduct anything other than actual 401(k) contributions, but it's on a piece of paper somewhere and I'll never find it.

Any thoughts about this?

[Belgarath]

Possible that Noo Joisy changed between when you first encountered this, and now? Although it does seem odd that they would allow a deduction for S/E deferrals, and yet not allow a deduction for other contributions. But hey, truth is stranger than fiction...

Here's a link - can't vouch for its accuracy - showing that whenever this was done, Noo Joisy had state and federal decoupled, so anything possible...

https://taxfoundation.org/state-conformity-federal-tax-reform/#4

I remember WAY back in the day when I think Minnesota didn't allow a state deduction for federally deductible IRA contributions. Probably lots of strange examples out there. Good luck figuring it out!

[Dare Johnson]

For NJ, the self employed 401k deductions are deducted on Sch NJ-BUS-1.

From the instructions:

Make the following adjustments to your federal Schedule C (or C-EZ or F):

5. Deduct your qualified contributions to a self-employed 401(k) Plan. Contributions that exceeded the federal limits are not deductible for New Jersey purposes.

[Bird]

13 hours ago, Dare Johnson said:

For NJ, the self employed 401k deductions are deducted on Sch NJ-BUS-1.

From the instructions:

Make the following adjustments to your federal Schedule C (or C-EZ or F):

5. Deduct your qualified contributions to a self-employed 401(k) Plan. Contributions that exceeded the federal limits are not deductible for New Jersey purposes.

Thanks but I'm not sure what you are saying here - the implication is that anything exceeding the federal 401(k) limit (i.e. 402(g) is not deductible. But someone from the state is directly contradicting that...

[rocknrolls2]

Bird,

I took a look at the statutory citation you referenced and it deals with what is included in gross income for NJ state income tax purposes. Basically, the section states that 401(k) contributions are excluded from an employee's gross income. I think the agent is mixing up the employee-level income exclusion with the employer-level income tax deduction. The elective deferrals for each employee, up to the 402(g) limit and as permitted by the results under the average deferral percentage test, to the extent applicable, would be deductible at the employer level and reported on Form NJ-BUS-1. In addition, any employer contributions, including matching and profit-sharing (non-elective) contributions, would be deductible at the employer level, subject to the 25% of compensation limit, as adjusted with respect to self-employed individuals. I hope this clarifies this for you and helps get the agent off your client's back.

[cathyw]

I would read the statutory language you cited from N.J. Stat. § 54A:6-21 as only applying to the salary deferral contribution, specifically "amounts contributed by an employer on behalf of and at the election of an employee".  The match and/or profit sharing contribution is not at the election of the employee.

[Bird]

Thanks all.

On 6/16/2023 at 3:47 PM, rocknrolls2 said:

...and helps get the agent off your client's back.

Actually the problem is that the agent was giving an answer (to someone else) that was contrary to what we all think, i.e. the agent was allowing the deduction for any/all contributions. The accountant who brought it to my attention was surprised, as was I. 

[Bird]

An update on this - the accountant I had been speaking to posed the question himself, and got the same answer, which is that all (employEE and employER) contributions are deductible. The question was specific to the DC limit of $61,000 but the logic should apply to DB contributions as well. Full text is below. I am not entirely comfortable with it since, as noted in my original post, I know of a client who had the employER deductions disallowed about 10 years ago.

From: Taxation Regulatory Services [TREAS] <Taxation.RegulatoryServices@treas.nj.gov>
Sent: Thursday, August 31, 2023 11:24 AM
To: xxxxxxxxxxxxxxx
Subject: Qualified 401k Plan Contributions on Schedule C

You made the following inquiry:
 
“For a 2022 NJ-1040, Schedule C, NJ instructions state: "Deduct qualified contributions to a self-employed 401(k) Plan. Contributions that exceeded the federal limits are not deductible for New Jersey purposes." What is NJ's maximum qualified contribution for a solo 401(k) for a Schedule C business owner over 50 years with no employees? Does the deduction for qualified contributions include the employer and employee portion ($61,000) or just the employee amount ($27,000)? Thank you for your help with matter. If you could provide any specific code, it would be appreciated. I find the instructions to be too vague at https://www.nj.gov/treasury/taxation/njit11.shtml.
 
NJ Division of Taxation - Income Tax - Business Income
 
Income Tax - Business Income?"
 
The treatment of 401(k) plans under the New Jersey Gross Income Tax Act is set forth at N.J.S.A. 54A:6-21: “Gross income shall not include amounts contributed by an employer on behalf of and at the election of an employee to a trust which is part of a qualified cash or deferred arrangement which meets the requirements of section 401(k) of the 1954 Internal Revenue Code, as amended.”
 
In regard to 401(k) plan contributions, these contributions are tax-deferred for New Jersey income tax purposes and there is no contribution limit to 401(k) plans in the New Jersey Gross Income Tax Act. N.J.S.A. 54A:6-21.
 
Taxes are not paid on employer contributions, which includes includes any 401(k) matching contributions, employer profit sharing contributions or any other types of contributions the employer made to the plan on your behalf.
 
For 2022, Maximum elective contribution limit        $27,000
 
Maximum contribution limit (younger than 50)    $61,000
 
Maximum contribution limit (50 and older)              $67,500
..
 
The self employed 401k deduction should be deducted on Schedule NJ-BUS-1 unless the elective deferral was already deducted from wages on Form W-2 because the elective deferral cannot be deducted twice.
 
From page 15 of the NJ-1040 instructions:
 
“Schedule NJ-BUS-1 Business Income Summary Schedule Part I – Net Profits From Business Report the net profits or loss from your business, trade, or profession. Make the following adjustments to your federal Schedule C (or C-EZ or F): 1. Add any amount you deducted for taxes based on income. 2. Subtract interest you reported on federal Schedule C (or C-EZ or F) that is exempt for New Jersey purposes but taxable for federal purposes. 3. Add interest not reported on federal Schedule C (or C-EZ or F) from states or political subdivisions outside New Jersey that is exempt for federal purposes. 4. Deduct meal and entertainment expenses that constitute ordinary expenses incurred in the conduct of a trade or business but that were not allowed on the federal return. 5. Deduct your qualified contributions to a self-employed 401(k) Plan. Contributions that exceeded the federal limits are not deductible for New Jersey purposes. . . .”
 
https://www.state.nj.us/treasury/taxation/pdf/current/1040i.pdf
 
Therefore, the deduction for qualified 401k plan contributions include the employer and employee contributions up to the maximum contribution limit (younger than 50) of $61,000.
 
I hope you find this information helpful.