Cost Basis inside a solo 401(k)??
Hi, I have an ex-pat client. He is over the age of 70 1/2 and we did a solo 401(k) contribution as an employee. He did the maximum amount of $24,000. His CPA advised that he take a salary of $102,500 paid through the schedule C. He then took a $102,500 for the foreign earned income exclusion. The remaining $147,000 of income was in the form of an S-corp distribution.
His CPA advised then advised him not to take a deduction for the 401(k) contribution. I can understand not wanting to make the contribution because you want to pay yourself S-corp income, but I didn’t understand not taking the deduction.
So here is the question. Is this essentially treated like a non-deductible IRA contribution? Does the solo 401(k) now have a cost basis? Or am I dealing with and excess contribution that needs to be removed. Thanks.
Permalink Submitted by David Mertz on Sat, 2018-06-30 01:42
If he only has one company and it is a S-corp, his salary cannot be reported on Schedule C. He is an employee of the S-corp and the S-corp must report his income on a W-2. To make an elective deferral to the 401(k) the S-corp must withhold the elective deferral from his pay, deposit it into the 401(k), exclude the elective deferral from the amount reported in box 1 of the W-2 and report the elective deferral with code D in box 12 of the W-2. The amount reported in box 1 can be excluded from income under the Foreign Earned Income Exclusion if the requirements are met. The elective deferral and W-2 box 1 wages are deductions on the S-corp’s tax return. The elective deferral is not deductible on his individual tax return. The deduction on the S-corp’s tax return for the elective deferral reduces the amount of income that passes through from the S-corp on the Schedule K-1.