Deferral Deductibility

I've seen TPAs and CPAs alike get tripped up on this topic, so any clarity would be much appreciated.  W-2 wages are a deductible expense on a business tax return, regardless of whether the recipient is an owner or nonowner.  I've been told that deferrals (for both owner and nonowner) are also deductible on the business return, as according to the IRC they are technically considered a type of employer contribution even though they originate from paychecks.  The IRC considers them ER conts in this respect, it was explained, because the employer voluntarily established the 401k plan.  This would explain why one would think that any W-2 amounts that are deferred could be deducted twice - once as wages and again as deferrals.  Thinking it's too good to be true, it would make more sense that the non-deferred W-2 amounts are deductible as wages and the deferred amounts are deductible as deferrals so that the same $ are not deducted twice.  I've heard both sides of this debate - what is the correct explanation?    

I am not a tax expert but my understanding is that 401(k) contributions are not included in salary reported on the corporate tax return (just as they are not included in Box 1 of the W-2). They are deducted as pension contributions.

From the instructions to Form 1120S:

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Line 7. Compensation of Officers and Line 8. Salaries and Wages

Don't include salaries and wages reported elsewhere on the return, such as amounts included in cost of goods sold, elective contributions to a section 401(k) cash or deferred arrangement, or amounts contributed under a salary reduction SEP agreement or a SIMPLE IRA plan.

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Line 17. Pension, Profit-Sharing, etc., Plans

Enter the deductible contributions not claimed elsewhere on the return made by the corporation for its employees under a qualified pension, profit-sharing, annuity, or simplified employee pension (SEP) or SIMPLE IRA plan, or any other deferred compensation plan.

I have never heard anyone claim you can deduct them twice.  They are considered employer contributions.   In a sense they simply don't ever become Box 1 wages.   So they can't be deducted as wages.     They really don't come from a person paycheck by the way.   We tend to show it that way to help people understand what is going on.  But what you are doing when you make a deferral election is declare part of your total compensation is being put into a retirement plan.  Once again as such they never became wages.  

I can't cite anything but I also find the idea anyone seriously claims you deduct them twice laughable.   If that were true it would be announced on every 401(k) sales material and the best benefit for a company to set up a 401(k).  

Thank you both.  I knew I wasn't going crazy, at least not yet anyway.  I also frequently see W-2 forms that do not exclude deferrals from box 1. 

Like I said, too good to be true.  Have a great weekend!

FWIW my accountant includes the 401(k) contributions in wages (C corp), and obviously not under the pension, profit sharing, etc. line.  That's what makes sense to me.  I see the instructions appear to say otherwise but somehow don't know that's what they meant.

Agree 100% that they are deducted only once.

On 4/16/2021 at 11:04 PM, Lucky32 said:

I also frequently see W-2 forms that do not exclude deferrals from box 1.

That should happen with Roth deferrals, which are after-tax, and in that case I think the employer would deduct as wages rather than contributions - but these are the accountant's problem(s), not yours.

I agree with ESOP guy; that's the way we've handled my company's records.