Too much SEP?

[Snaggletooth]

"Bubba" Dimwit is self-employed as a Javelin catcher and hires himself out for Olympic, GoodWill and other track & field events.

For 2011 he has self-employment income, and his accountant computes the maximum SEP contribution. Bubba deposits the
SEP amount by the appropriate date.

Early in 2012 he realizes there is a substantial deductible expenditure for inflatable chest protectors, amounting to a few thousand
dollars, and he failed to take the deduction in 2011.

Dimwit has his tax preparer do an amended return for 2011, as the deduction was perfectly legitimate.

As his 2011 self-employment income has decreased, the SEP calculation would produce a lower contribution. However, the
contribution has already been made. Is there a penalty now for an excessive SEP contribution?

[mactoolsix]

10% tax on excess contributions - good thing is they can be "carried over" to the next year.

If he doesn't qualify for a SEP in the next year, another 10%.


Why would he want to catch a javelin anyway?

Mike

[Snaggletooth]

Javelin Catcher

Thanks Mike. Your post is quite helpful.

Jobs are hard to find here in the rural south.

[JohnH]

Javelin catching isn't so bad. It's outside work and you get plenty of exercise. It keeps you sharp and on your toes. You are looking for tips but you try to avoid them. The only problem is, one mistake and you get the shaft.

[rjholmes]

I am bringing this post forward because I have a question about the form to report the 10% penalty. Will Dimwit report the tax on Form 5330? I know it is a stand-alone form, but can it be included on the 1040 tax return? I am just now preparing both 2012 and 2013 returns for an individual who has a construction business, no employees, and is also a full-time county employee. In both years he put $100/month into a SEP. In 2012 he had a loss and cannot deduct the $1200. Do I figure the tax on F5330? Also, if he cannot deduct any in 2013 either, will the tax for that year be figured on both years - $120 for 2012 and $240 for 2013 etc until he has enough SE income? I have never dealt with SEP excess contributions.

[appelman]

Is something wrong with Snag's dates?

"In early 2012" the 2011 return would probably not have been filed yet. And doesn't he have until the filing date to withdraw the excess and earnings without penalty?

[Kram BergGold]

Stop

From the post, I understand that the deposit was made in the year following the year of the return that was amended. So the excess just becomes a contribution for the year of the deposit. No penalty. My understanding is the IRS is not told what year SEP contributions are made for, unlike IRA contributions. So as long as he has enough SE iincome in year two to absorb the over contribution you are all set.

[S T]

My understanding if you find an overpayment of a SEP, you can instruct the Account to move the amount to the next year for a correction.

Should be accomplished though within a reasonable period of time, not exactly sure of that time period, I usually have my SEP clients on extension until 10/15

Most Accounts offering SEPS are aware that there might need to be corrections.

Sandy

[rjholmes]

Loss on Sch C both years

This man had a loss for both 2012 and 2013 while continuing to make monthly deposits totaling $1200/year. None will be deductible on his 1040 return for either year. I am wondering what I do next. Will I prepare form 5330 for each year, and will the 2013 excise tax be based on both years' total? I have never had an excess SEP contribution to deal with. I have a few clients who have SEP accounts but they usually make their contributions after it is figured on their return.