S Corp Individual 401K adjusting/removing the company contribution due to company losses

[kevin_ny_2003]

I have an S Corp , I am using Turbotax for Business for filing my business taxes. While doing the Expense / Income calculation I realized that the business was in loss. 

The issue is that I ran almost 50K in payroll and deposited 25% of that 50K 12500 as company contribution in the individual 401K plan . Per IRS rules I think we can only contribute into company part of 401K if the business went in profit. I also contributed in the employee portion some amount but I think that is not subject to the company operating in profit. Please clarify if I am wrong on the company / employee contribution understanding.  The lesson learned here is I should contribute for employer contribution at the end of year after calculating P&L.

Please suggest what is the best course of action to fix this? I already filed for business extension so I am good till Oct 15th 2020, but would prefer to file it before July 15th , 2020 the deadline for individual taxes this year.

Thanks much

Kevin

[dmertz · Accepted solution]

"Per IRS rules I think we can only contribute into company part of 401K if the business went in profit."

I don't think that that is correct.  If you were self-employed you cannot make a retirement contribution without net profit, but you are not self-employed.  You are an employee of the S corp and the S corp, not you, is making the employer contribution.  Whether it is good business practice for a nonprofitable S corp to make an employer contribution (other than a matching contribution that might be required under the plan) is questionable, however.

Also who is "we" in the quoted sentence above?  Your question seems to suggest that you are the only employee.

[kevin_ny_2003]

That is correct in this case , My wife is the owner of S corp and I am the employee.

Thanks

[dmertz]

In that case, since it is a "profit sharing" contribution (even though there is no profit) instead of a matching contribution, the contribution for each of you must be the same percentage of compensation (25% in this case).  However, the decision to make employee elective deferrals or Roth contributions is an individual decision.