Deductible Year

Technical topics regarding tax preparation.
#1
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New client who prepared his own 2015 tax return. He is self-employed.

He made $3,000 contribution to his SEP-IRA account in March 2016 but it was for 2015 contribution. Then instead of deducting the $3,000 in his 2015 tax return, he has deducted it in the 2016 tax return.

Is it necessary for him to amend his tax returns to move the deduction from his 2016 tax return to the 2015 tax return?
 

#2
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How do you tell the difference between a 2015 contribution made in March of 2016, and a 2016 contribution made in March of 2016? And what brought this to your attention in Dec of 2018?
 

#3
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TaxMonkey wrote:And what brought this to your attention in Dec of 2018?


New tax client and I found that out when I was reviewing his past year tax returns.

How do you tell the difference between a 2015 contribution made in March of 2016, and a 2016 contribution made in March of 2016?


The contribution amount should also match his self-employed income.

For example, taxpayer's 2015 total business profit was $30,000 and his SEP-IRA contribution was $4,300. He made the contribution in March 2016. He claimed it in his 2016 tax return instead of 2015.

I understand it should be fine if he had enough business profit in 2016 to absorb the $4,300 contribution which was supposed for year 2015. But what about if his business income in 2016 decreased and the $4,300 exceeded the maximum contribution amount?
Last edited by AccTaxMan on 7-Dec-2018 4:19pm, edited 2 times in total.
 

#4
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Yes, now that is the real rub - if he over contributed to his SEP in 2016 then he may in fact, be subject to an excess contribution penalty and it may be worth amending.
 

#5
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According to the Section 404 regs,
Deductions under section 404(a) are generally allowable only for the year in which the contribution or compensation is paid, regardless of the fact that the taxpayer may make his returns on the accrual method of accounting. Exceptions are made in the case of over payments as provided in paragraphs (1), (3), and (7) of section 404(a), and, as provided by section 404(a)(6), in the case of payments made by a taxpayer on the accrual method of accounting not later than the time prescribed by law for filing the return for the taxable year of accrual (including extensions thereof). This latter provision is intended to permit a taxpayer on the accrual method to deduct such accrued contribution or compensation in the year of accrual, provided payment is actually made not later than the time prescribed by law for filing the return for the taxable year of accrual (including extensions thereof), but this provision is not applicable unless, during the taxable year on account of which the contribution is made, the taxpayer incurs a liability to make the contribution, the amount of which is accruable under section 461 for such taxable year. See section 461 and the regulations thereunder. There is another exception in the case of certain taxpayers who are required to make additional contributions as a result of the Act of June 15, 1955 (Public Law 74, 84th Cong., 69 Stat. 134), and the regulations thereunder.
Does this help us at all?

I thought that I learned somewhere that the taxpayer indicates which year a "not later than the due date" payment is to be deducted for by claiming the deduction on that year's return. If that's the case...
 


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