Deducting a Pension Expense on the Cash Basis After the End of the Year

by Ashley Mott

Under the cash basis system of accounting, payments and distributions to employee benefit plans must be made before the end of a calendar or fiscal year to count as an income tax deduction for the same year. However, both profit-sharing and pension plans allow for the deduction of contributions to a pension plan or other retirement accounts up until the due date of an income tax return. This allows most taxpayers to fund retirement accounts or a pension until the April 15 filing deadline.

Prepare the year-end financial statements for your business. Many retirement accounts for sole-proprietorships limit funding to a set percentage of gross earnings less deductions and one-half of the owner's self-employment tax.

Calculate the amount needed to fund your pension or the pension of your employees based on the pension agreement. Verify that the total calculated does not exceed your company's maximum allowed distribution on accounts with contribution limits.

Distribute the funds by the tax filing deadline. If you apply for a tax filing extension, the due date for pension contributions also extends.

Report the total contribution to pensions under the "Expenses" section of Internal Revenue Service Schedule C, Profit or Loss from Business. List the amount of contributions to pension and profit-sharing plans on Line 19, and list contributions to other employee benefit programs, such as a 401k plan or individual retirement account, on Line 14.

Tip

  • If pension contributions were incorrectly reported on tax documents, file an amended return with the IRS to fix the mistake. A sole-proprietorship must file Form 1040X, Amended U.S. Individual Income Tax Return. Attach a copy of any corrected tax form schedules to the Form 1040X.

Warning

  • Contributions to a 401k or an IRA for the owner of a sole-proprietorship must be reported under the Adjusted Gross Income (AGI) section of IRS Form 1040, U.S. Individual Income Tax Return and not on the Schedule C. Only report contributions to employee retirement accounts and other employee benefits on the Schedule C.

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