Effect of Engaging in a prohibited transaction (PT) with a Solo 401k:
- A disqualified person who takes part in a prohibited transaction with a Solo 401k plan must correct the transaction and must pay an excise tax based on the amount involved in the transaction.
- The initial tax on prohibited transaction is 15% of the amount involved for each year (or part of the year) in the taxable period.
- If the transaction is not corrected within the taxable period, an additional tax of 100% of the amount involved is imposed. Both taxes are payable by any disqualified person who participated in the transaction (other than a fiduciary acting only as such).
- If more than one person takes part in the transaction, each person can be jointly and severally liable for the entire tax
- The amount involved in a prohibited transaction is the greater of the following amounts:
the money and fair market value of any property given; and
the money and fair market value of any property received.
- If services are performed, the amount involved is any excess compensation given or received.
- The taxable period starts on the transaction date and ends on the earliest of the following days:
the day the IRS mails a notice of deficiency for the tax;
the day the IRS assesses the tax; and
the day the correction of the transaction is completed.
- The tax is paid with Form 5330