Qualify for Premium Tax Credit with S-Corp contribution to a SEP retirement plan

[ScottW]

I'm trying to lower the taxpayers 1040 income by $10k so he qualifies for the Health Insurance Premium Tax Credit.

Here's the situation and an idea:


Single owner of LLC being taxed as an S-Corp has made 2018 retirement plan contributions as follows:

1) He and his wife (both over 50) have contributed $6,500 each to a their traditional IRA's

2) Through his 2018 wages from the S-Corp he had $20k of contributions to a deferred compensation plan, a Solo 401(k).

Question is - Can the S-Corp create and fund $10k to a SEP for 2018? (As long as it's done before the Sept 15 extension deadline for the S-Corp return)?

The other issue is that the $10k SEP contribution (an expense on the 1120-S return) would increase the S-Corp loss from $4k to $14k. His owners basis is zero after the $4k loss. So to realize the additional $10k loss, he would have to make a capital contribution to the S-Corp for the $10k (which would increase his basis so the full loss can be realized). Could the $10k owners contribution be considered a 2018 contribution, which would allow the full $14k loss to flow through to his 1040 for 2018?

Thanks for taking the time to help with this issue.

Take care

[TaxGuyBill]

Hypothetically, yes, the corporation can make a SEP contribution by September 15th.

However, NO, a capital contribution made in 2019 can't be applied to 2018. With no Basis to take the loss, then a SEP contribution won't lower MAGI for the Premium Tax Credit. So your idea won't work.


For future reference, you would need to determine if a $10,000 SEP contribution would be allowed A SEP is limited to 25% of wages, so there must have been at least $40,000 in wages to make a $10,000 SEP contribution. Also, must be the same percentage for all eligible employees (if there are no other employees, that isn't a problem). You MIGHT also need to determine if the 401k contributions were employee contributions (made by December 31st of the tax year) or employer contributions (made by the extended due date of the tax return), as I think the employer-401k amount MIGHT affect the SEP limit (I would need to look that up though).

[ScottW]

Thanks for the reply and info. I was afraid that the capital contribution would be a problem.

The owner was the only ee. The $20k 401(k) contribution was made through payroll before Dec 31 (on a bonus check). In addition there was $21k of health insurance reimbursement reported on his W-2 plus $20k of regular salary.

So if there was enough basis, I think it would have worked. But as you pointed out, without the basis the owner can't take the additional loss on his 1040. Too bad, because as the numbers worked out, with a $10k increase in his business loss he would have qualified for $15k of premium tax credit. Without the additional loss, his premium tax credit is zero.

Any other last minute ideas?

Take care

[TaxGuyBill]

Thanks for the reply and info. I was afraid that the capital contribution would be a problem.

The owner was the only ee. The $20k 401(k) contribution was made through payroll before Dec 31 (on a bonus check). In addition there was $21k of health insurance reimbursement reported on his W-2 plus $20k of regular salary.

So if there was enough basis, I think it would have worked. But as you pointed out, without the basis the owner can't take the additional loss on his 1040. Too bad, because as the numbers worked out, with a $10k increase in his business loss he would have qualified for $15k of premium tax credit. Without the additional loss, his premium tax credit is zero.

Any other last minute ideas?

Take care

Turn back time and have him make the capital contribution in 2018. :-)