Reduced solo 401-K contribution limit after amending prior year returns.

[Ringers]

A prospective new client dropped off his 2022 and 2023 returns for review.  He is the manager of a family farm which has been divided into about 9 individual farms each operated by a different farmer.  The client files a Schedule F as a farm manager since 2022.  The current preparer has deducted office in home expenses  of about $7000 per year but did not take any depreciation on the home office, which should probably be about $3000 each year.

The T/P contributed the maximum amount to a solo 401_K in both 2022 and 2023.  If I amend the returns, the net profit will decrease and so will the allowable 401-K deduction that has already been made for 2022 and 2023.  What do I do about the two overcontributions when I amend since the overcontributed amounts will also have earnings within the 401-K?

Thanks!!

[Margaret CPA in OH]

This may well not help that much but I am a bit surprised about the amount of HO depreciation.  Does that also include allocation of expenses?  Would it be worth checking for the Simplified Method of $5 per square foot.  There would be no depreciation, etc. but also no recapture and may not be as large an impact on the overcontribution.

[Lee B]

How could the depreciation be that much unless that also includes office equipment and furniture?

I thought home office was 39 year property?

[BulldogTom]

19 minutes ago, Lee B said:

How could the depreciation be that much unless that also includes office equipment and furniture?

I thought home office was 39 year property?

It is  39 Year property.  3K of depreciation makes 117K the office basis, which if it was 10% of the home it gets you to a 1.2MM home.   Plausible.  3000 square foot home with a 300 square foot office?  7K of expenses does not sound like such a stretch if the home is worth that much, especially if there is a mortgage on it.   Not sure about IL property taxes, but again, if the home is worth that amount, the tax bill is not cheap.   Not saying these are facts, just making an observation that everything is plausible.

If you wait until you file the 2024 return, you could slip in a 1310 and get the depreciation back....that is not the correct way to do it, you should amend and notify the plan administrator of the corrective distributions needed and pay the penalty for the excess contribution.   You will get a 2024 1099R from them that includes the earnings.

Tom
Longview, TX

[Ringers]

Thank you to all who responded.  The OP talked the client into claiming an office of 600 sq. ft in an 1800 sq ft. house, so the business use is 33.3%  I asked the client if he could justify regular and exclusive use of his entire basement for use in administering the farm operations and he responded "of course not!"

 

I think I can talk him into amending the office to a more reasonable 250 sq. ft, in which case we can amend both returns and still leave the 401-K payment intact since we will also reduce the other expenses for the office from 33.3% to 14%.

 

Ringers