Not Sure If Anything Can Be Done Here

[Dougsbpc]

Sole Proprietor with a Solo 401(k) plan was with a brokerage firm that was bought by another brokerage firm. Apparently everything was very automatic in transferring investments etc. However, the sole proprietor had an automatic withdrawal of salary deferrals of $2,000 per month. When the new brokerage took over, the automatic $2,000 salary deferrals did not happen. It was always so automatic that the sole proprietor took a deduction for $24,000 for the 2024 year. Later, it was determined that none of the $24,000 went into the sole proprietor's account for 2024.

Does:

1. The sole proprietor just pound sand, suck it up, have his return amended and hand over the income tax, penalties and interest?

2. The sole proprietor have any possibility to deposit $24,000 now and keep the $24,000 deduction for the 2024 year?

Thanks.

 

[Bri]

If the 401(k) election is recorded in writing to authorize the 24,000, then you simply have a late 401k deposit issue.  

[C. B. Zeller]

Not even late. For an owner with earned income, they have until their tax return is finalized to deposit their deferrals. For a sole prop that can be as late as 4/15, or even later on extension.

I would have no problem saying that the establishment of an auto-$2k/month withdrawal constitues an election to defer $24k for the year. So just get the remaining money in by 4/15 and call it a day.

[Paul I]

The OP was about a 2024 tax return.

[C. B. Zeller]

Whoops. Missed that part. Then I agree with Bri, it's still a deferral election, it's merely late.

[David D]

For tax deduction purposes, contributions to the Sole Proprietor account must be made by 10-15 assuming an extension was filed for the personal taxes.  That goes for both employee and employer contributions.  He cannot deduct anything for 2024 unless other money was timely deposited.  

[Dougsbpc]

Suppose they have signed salary deferral elections indicating that they wanted the dollar amount indicated.

Since the deferrals did not go into the plan by 10/15/2025, could they be contributed now as a late deposit of salary deferrals and deducted for the 2025 year? They are on extension until 10/15/2026. Then of course they would need to go back and file an amended return for 2024 when they took a deduction for the contributions but they were never deposited to the plan.

Thanks.

[Paul I]

Interesting question.  When a Sole Proprietor files their income taxes, there is a distinction between what is deductible as a business expense and what is deductible as a personal expense.  This can be influenced by the type of business that the individual has formed and whether there are choices on how the business is taxed (like with LLCs).

For a sole proprietor, the instructions to Schedule C say "If the plan included you as a self-employed person, enter the contributions made as an employer on your behalf on
Schedule 1 (Form 1040), line 16, not on Schedule C." which flows into a Line 10 on the 1040.

If the only contribution are in question are elective deferrals, there is some logic to treat them solely as late deposits.  Consider other businesses that have late deposits.  They do not restate the businesses tax filing for a prior year because there were late deposits.

This is not advice.

[David D]

24 minutes ago, Paul I said:

I

If the only contribution are in question are elective deferrals, there is some logic to treat them solely as late deposits.  Consider other businesses that have late deposits.  They do not restate the businesses tax filing for a prior year because there were late deposits.

This is not advice.

The difference is for business tax returns, the deferrals are withheld from their employee paychecks. So the employee is making the contribution timely as it is withheld from their pay.  It's the employer that pays the penalty for sending in that money late.  

For the Sole Prop, if the money was not deposited by the extended due date of the tax return, no employer or employee contribution deduction is available for that year. Any deferrals contributed now will count towards the current 402g limit, so there is no benefit in trying to say they are late deferrals as they cannot be deducted for the year they were intended to be made.