The process of claiming a tax deduction for a Solo 401k contribution is based on the type of entity maintaining the Solo 401k plan (e.g., corporation, partnership, or sole proprietorship).
Sole proprietors and partners deduct contributions for themselves on their individual tax returns (i.e., IRS Form 1040, etc.).
Corporations deduct all Solo 401k or Individual K contributions on the corporate tax return. The chart in our immediate prior blog posting lists where various business entities claim deductions for Solo 401k or Individual K contributions.
IMPORTANT: Owners in a Subchapter S corporation can only use their W-2 income–not their pass-through income–for contribution purposes when contributing to their Solo 401k plan or Individual K. For more information regarding this rule see (Revenue Rulings 71-26 and 59-221).
When identifying compensation for Solo 401k Plan or Individual K contribution purposes as a self-employed individual, you must first determine the your earned income or net earnings from self-employment. As a self employed individual and depending on your type of self-employment, use one of the following forms to calculate net earnings for year of your Solo 401k contribution.
- A partnership generates a Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc., (an attachment to IRS Form 1065, U.S. Return of Partnership Income) for each individual partner reflecting the partner’s net earnings for the year.
- A sole proprietor must file a Schedule C, Profit or Loss From Business, (an attachment to IRS Form 1040, U.S. Individual Income Tax Return) reflecting the net earnings from the business for the year.
- Farmers file a Schedule F, Profit or Loss From Farming, (an attachment to their IRS Form 1040) to show net income from farming.
- Limited liability companies generally elect to treat their members as sole proprietors or partners for tax purposes. In this situation, members must file the appropriate schedule, as described above.
Deducting Solo 401k or Individual K Contributions
Contributions made to your Solo 401k plan (except for after-tax contributions) are tax deductible to you as the owner of the employer pursuant to IRC Sec. 404. However, for the Solo 401k contributions to be deductible for a given tax year, you as the employer must make the Solo 401k contribution by no later than the business’s tax return due date, including any extensions as outlined in (IRC Sec. 404(a)(6)).