Updated September 8, 2024
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. http://www.ustaxcourt.gov/InOpHistoric/laflamme.TCM.WPD.pdf
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 $69,000 for 2024 or $76,500 if you qualify for the $7,500 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.” Note that for later years, plan contributions are reported on line 16 of Schedule 1 an attachment to Form 1040. See also the following: https://www.mysolo401k.net/how-are-solo-401k-contributions-accounted-and-reported/
Lastly, this court case further confirms the importance of utilizing a Solo 401k provider like My Solo 401k Financial that you can go to for education or support in understanding the solo 401k contribution rules.
