Solo 401K contribution
In 2020 we set up solo 401K for client who is sole proprietor (files schedule C). Client filed extension for 2020, so my understanding is that she has until October filing deadline to make profit sharing contribution for 2020. Goal was to determine amount of contribution after seeing draft of return and assessing the impact on tax owed. However, there was confusion by client and CPA and return was filed before we could proceed.
Does the fact that the return has been filed impact the ability to make the contribution? Or can client still contribute and then amend the 2020 return? Thanks in advance.
Permalink Submitted by William Tuttle on Fri, 2021-10-01 13:43
The contribution deadline is extended by the filing of the extension. The actual filing of the return does not effect this. In fact an individual could file for an extension, file the return on time with or without the deduction and have until the extended due date to make contributions.
Permalink Submitted by Glenn Wager on Fri, 2021-10-01 18:07
Thank you for your reply. The client’s CPA believes that it’s too late to make profit sharing contribution for 2020 since return was filed without it. I was not 100% sure about the technicalities (hence why I am asking), but obviously he disagrees with your assessment. To quote the CPA: “I did some research and was unable to find any changes to the contribution publications to see if you are able to amend your returns to include a contribution. Unfortunately, the deadline to make any contributions as an employer to a 401k is the due date to file or the extension date -whichever comes first.” Can you point me to IRS publication or other source to convince him otherwise? Thanks again.
Permalink Submitted by William Tuttle on Sun, 2021-10-03 13:08
This CPA does not understand the fundamental tenets of the tax code, IRS regulations, guidance and publications.
The above is mostly about what is prohibited and not what is allowed. As a general rule, that which is not expressly prohibited is allowed.
There are very few explicit prescriptions about what is precisely allowed. There would have to be an indefinite number of pages to cover all the permutations. More often it is by reference, interpretation and inference.
I don’t know where they came up with this idea that the contribution deadline is the earlier of the tax filing deadline (including extensions) and the actual tax filing date. It is most definitely incorrect. Why don’t you ask them what substantial authority there is for their claim.
The entire tax code section covering the employer contribution deadline is found in 26 U.S. Code § 404(a)(6) – For purposes of paragraphs (1), (2), and (3), a taxpayer shall be deemed to have made a payment on the last day of the preceding taxable year if the payment is on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (including extensions thereof).
There is absolutely no mention of the actual tax filing date, nor is there any other IRS guidance doing so.
Let’s look at the tax code for the IRA contribution deadline. 26 U.S. Code § 219(f)(3) – For purposes of this section, a taxpayer shall be deemed to have made a contribution to an individual retirement plan on the last day of the preceding taxable year if the contribution is made on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (not including extensions thereof).
Yet no one would dispute the fact that an individual can file their tax return early and still have until the tax filing deadline to actually make the IRA contribution.
This is not remotely a gray area. It is 100% black and white. Don’t even begin to let this CPA claim there is a difference because the IRA contribution deadline is without extensions and the 401k employer contribution deadline is with extensions. That is a Red Herring fallacy.
For further confirmation, refer to Publication 560, Chapter 4 Qualified plans, page 15, top of middle column When Contributions Are Considered Made
You generally apply your plan contributions to the year in which you make them. But you can apply them to the previous year if all the following requirements are met.
You make them by the due date of your tax return for the previous year (plus ex-tensions).