Taxpayer sets up S-Corporation owning 100% shares and he is the ONLY employee.
The corporation provides software consulting services to other large corporations.
He sets up "Self-employed 401(k) Profit sharing Plan" with a custodian, who sponsors prototype plan.
He charges 120000 salary to his S-Corp and contributes 16500 employee share of 401(k) out of his salary.
S-Corp contributes 30000 (25% max of his salary of 120000) towards the 401(k) Profit sharing plan.
S-Corporations results are as follows:
160000 Gross income from business
-50000 Other operating expenses
-120000 Salary (to100% shareholder-employee)
- 10000 Operating loss before Employer contribution to 401(k)
- 30000 Employer's contribution to 401(k) Profit sharing Plan
- 40000 Net operating loss from S-Corp
20000 Stock basis
25000 Short term loan basis
45000 Stock + Loan basis
-40000 Loss reported on K-1 (1120S)
5000 Remaining loan basis
Is the S-Corp allowed to deduct 401(k) contribution in this example even though it has no current profit?
If it is allowed, did it contribute excess $16500 ?
30000 Maximum contribution (25% X 120000)
-16500 Contributed by employee
=13500 Remaining available for employer to contribute
-30000 Employer contribution
=16500 Excess contribution
What happens if the shareholder did not have enough basis to deduct ?
In what way employer's contribution to 100% shareholder-employee different from Health insurance premium paid and separately stated on Form K-1 (1120S). Both are kind of fringe benefits.
Appreciate any views and comments from readers.
Thank you
The corporation provides software consulting services to other large corporations.
He sets up "Self-employed 401(k) Profit sharing Plan" with a custodian, who sponsors prototype plan.
He charges 120000 salary to his S-Corp and contributes 16500 employee share of 401(k) out of his salary.
S-Corp contributes 30000 (25% max of his salary of 120000) towards the 401(k) Profit sharing plan.
S-Corporations results are as follows:
160000 Gross income from business
-50000 Other operating expenses
-120000 Salary (to100% shareholder-employee)
- 10000 Operating loss before Employer contribution to 401(k)
- 30000 Employer's contribution to 401(k) Profit sharing Plan
- 40000 Net operating loss from S-Corp
20000 Stock basis
25000 Short term loan basis
45000 Stock + Loan basis
-40000 Loss reported on K-1 (1120S)
5000 Remaining loan basis
Is the S-Corp allowed to deduct 401(k) contribution in this example even though it has no current profit?
If it is allowed, did it contribute excess $16500 ?
30000 Maximum contribution (25% X 120000)
-16500 Contributed by employee
=13500 Remaining available for employer to contribute
-30000 Employer contribution
=16500 Excess contribution
What happens if the shareholder did not have enough basis to deduct ?
In what way employer's contribution to 100% shareholder-employee different from Health insurance premium paid and separately stated on Form K-1 (1120S). Both are kind of fringe benefits.
Appreciate any views and comments from readers.
Thank you