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Schedule C Business Loss effect on past 401K contributions?

I have/had consulting business for more than 5 years (along with working as an "employee" for another firm). Tax-wise there's always been a profit (SE income), but much/most of it was actually put into a SE-401K (my reguarly employer doesn't have a retirement plan). In fact the maximum contribution was placed in the 401K SE every year. Because my regular wage income was over the SS limit (no 12.4% ss tax), except for the medicare (2.9%), a total ~15K +20% profit was contributed every year (nice deal).

However in 2008 I will have a loss. In fact I will have no new revenue on a cash-basis this year (no 1099 income). This loss is due to the fact that I was paid in advance in Dec 2007 for consulting to be performed in 2008; with the taxes on these funds therefore paid on my

2007 return. The estimated amount of the loss is relatively small, but significant (~ $5K).

Is part of the 2008 business loss deductable against other 2008 income? I also understand that you can (or may be required) to carry forward part/all of the loss to be deducted against future business profits. I also understand that it may be possible to carry back the loss against prior years to get a a more immediate benefit.

My two questions are:

1) What is the quick summary of how a loss is handled (I checked the relevent IRS pub and it seems very complicated) in terms of what it can be deducted against.

2) How does the loss and how it is handled (especially it is applied to past years), effect past 401K contributions? For example if it possible to get a credit for the loss based on past year's profits does this method effect the allowable 401K contribution for that past year the loss is applied against requiring some adjustment/withdrawal of/from the 401K ?

Reply to
aloy.parker
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Check out Net Operating Loss.

However if your wages from your job are more than your business loss, you will not have an NOL and would deduct the schedule C loss currently.

If you have a true NOL, you carry back two years (unless electing not to carry back) and then forward. But if your wages exceed your Sch C loss there is no NOL.

Reply to
Arthur Kamlet

This is interesting. Are you then saying a Sched. C filer could pump up their retirement plan by arranging to report excessive profit in one year and then a loss the next (since the NOL flows to 1040 and not Sched C)?

In such a scheme, TP could conceivably defer more than their actual cumulative business profit.

Wouldn't be the first loophole in the code, but it seems pretty glaring if it's there.

Steve

Reply to
Steve Pope

I'm not following. The SE retirement plan contribution would not exceed the net earnings from self employment. In a losing year no contribution.

Could you be more explicit?

Reply to
Arthur Kamlet

Assuming that 15k + 20% was less than 49k or so, be aware that you can set up a SEP-IRA and sock away 49k a year.

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If you have a 401K at your other company, I imagine that the combined amount deposited into that 401K and your SEP-IRA cannot exceed 49k, but I could be wrong on this.

And if you have employees you have to offer them the same benefits, otherwise your plan is discrimination. There are safe harbor rules for IRA.

Reply to
removeps-groups

If you amend a prior year return with the NOL and the profit is reduced for that year, then you have to withdraw some of the 401K money. Does the 10% penalty on earnings then apply?

Reply to
removeps-groups

Let's say TP has a Schedule C with 20K in profit one year, and a Schedule C with 20K in loss the following year. The TP (if over age 50) can put the entire profit of

20K from the first year into an individual 401(k) plan -- but on an accumulated basis the business never made any profit.

I think under this scenario, it would be a disadvantage for the TP for carry back the loss, because it would zero out line 12 of the prior year 1040 and (this is the part I'm unsure of) require a corrective distribution from the plan.

As I said I'm unsure of the ramifications of this but it seems like a possible win to not have the profit and loss fall into the same tax year.

Steve

Reply to
Steve Pope

Interesting.

Reply to
Arthur Kamlet

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