Is Solo 401k Contributions deductible as business expense?

As recently addressed by U.S. Tax court in LaFlamee v. Commissioner, Solo 401k contributions are not deductible as business expenses when determining the self-employment tax.  Here’s link to this court case.

Don’t confuse this with solo 401k or Individual 401k contribution which  qualifies for income tax deduction.  When you open solo 401k, you can still take tax deduction on the annual contribution which is $50,000 for 2012 or $55,500 if you qualify for the $5,500 catch-up amount.  Further, self-employed taxpayer still qualifies for deductions of expenses in connection with his or her trade or business when calculating self-employment income; just remember that a Solo 401k contribution is not treated as a business expense.  

Background of LaFlamee v. Commissioner

The individual, a self-employed real estate broker, made a contribution in excess of $34,000 to her pension plan, which was within the annual contribution limits. However, the error occurred when she filed Schedule C (Profit or Loss from Business), which is part of Form 1040, and claimed the contribution as a business expense. This resulted in lower net earnings from self-employment and thus lower self-employment tax.  Instead, the IRS detailed that the individual should have deducted the plan contribution on line 28 of Form 1040. This is the same line that Solo 401k or Individual 401k contribution is deducted. Line 28 is titled “Self-employed SEP, SIMPLE, and qualified plans.”

Lastly, this court case further confirms the importance of utilizing a Solo 401k provider like that you can go to for education or support in understanding the solo 401k contribution rules.

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>


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