corrected sep contribution after due date
see 7-29-11 posting re corrected sep contribution after due date for background info. I’m confused re alan-oniras response. If the contribution is FOR the year 2009, but is not made until Aug 2011(error was not discovered until July 2011), is it deductible on the employer’s 2011 return? Or, is the deduction FOR the 2009 year contribution lost forever because it was not made by the extended due date of the 2009 tax return? The employer will also make a contribution FOR 2011 in 2012 (by the extended due date of 2011 tax return). Both of the contributions will be at 25% of employee comp. Employer is cash basis taxpayer.
Permalink Submitted by Alan Spross on Mon, 2011-08-08 17:40
I agree, the prior post was not clear.
There was no clear guidance on the IRS site exactly if and when the makeup SEP contribution could be deducted. The site indicated that the deduction could not be taken in the year the makeup is FOR because it was not made by the extended due date. But the IRS site only indicates it is not deductible for the applicable year and is silent on whether it could be deducted in the later year in which it was made.
Therefore, it is not clear whether it could be deducted in 2011 or not, but 2011 appears to be the only possibility. Not sure whether it will fly in 2011 or not.
Permalink Submitted by Martin Helmer on Mon, 2011-08-08 19:48
It’s not possible to take a 25% deduction for 2011 while simultaneously taking the 2009 deduction too. Section 404(h) says a SEP’s deduction is subject to the section 404 rules. 404(a)(3) says you get a deduction in the year paid, subject to a limit of 25% of the current year’s compensation. The effect is that a late contribution becomes a limiting factor against the current year’s maximum.
So let’s say the owner made $100,000 in 2009, and the other employee made $30,000. The plan’s formula provides that everyone gets the same percentage of compensation as a contribution. For 2011 the amounts are $110,000 and $30,000 respectively. The late contribution is $7,500 plus lost earnings. Restoration of lost earnings doesn’t count against the 25% limit. See for exaple, Rev. Proc. 2008-50. But no additional contribution could be made for anyone for 2011, once 25% of the employee’s 2011 pay has already been contributed.
So the deduction is not lost forever in that it can be deducted later than originally intended. But a deduction is lost forever in that it might limit what you are trying to deduct in a future year.
Additional bad news is that 402(h) makes the 25% limit applicable on a per person basis for the SEP. A profit sharing plan uses aggregate pay of all eligible participants to calculate the 25% amount, providing a little more flexibility for certain situations.