Problem with Deductible IRA Contribution from Sole Proprietorship Income

[williamd2]

I have income only from a sole proprietorship. According to IRS rules, if I have no retirement plan at work, then I can make a fully deductible Traditional IRA contribution based this income up to the standard deduction limits for 2023 without any reduction based on AGI limits. However, TurboTax Home and Business Step-By-Step does not seem to take this into account, and still uses my AGI to automatically reduce my deduction.

Is this a problem with TurboTax? Do I need to bypass Step-By-Step and enter information directly on the forms? Or am I misinterpreting IRS rules?

[AmyC · Accepted solution]

Yes, a sole proprietor with no retirement plan, you can make IRA deductions provided the business has the income to support it. The program should give you the full deduction unless you have marked a retirement plan available somewhere in the program. Check through the forms to be sure an errant mark did not appear. To see your forms:

• In desktop, switch to Forms Mode. 
• For online, see How do I preview my TurboTax Online return before filing?

See Retirement Plans as you may want to add another retirement plan. You qualify for more options with higher limits and many can be opened until April 15 for last year, just like the traditional IRA.

You mention having a Traditional IRA.   A traditional IRA will reduce your taxable income as opposed to a ROTH.

[williamd2]

AmyC, thanks so very much for your incredibly fast response. Indeed, the Retirement Plan at Work box was checked on the IRA Contributions Worksheet, and I was able to figure out why.

Again, thanks for being so helpful on this very vexing problem.

[jannethu]

Great this topic is brought up.  I'm in the same situation and I will expect my sole proprietorship to generate business profit for the coming tax year.  However at a second thought, if I only have income on schedule C (along with related forms e.g. 8995, 8829, 4562 in owning a business), is that considered as Earned Income,  to be eligible to contribute to a traditional IRA? Normally you need to have a w2 or 1099-NEC to be eligible to contribute to a traditional IRA for tax deduction.   

Thanks!

[VolvoGirl]

Yes if you have a Net Profit on Schedule C.  If you have self-employment income you can only contribute up to your net profit reduced by the deduction allowed for the ER portion of your self-employment taxes. The 1/2 SE Tax amount will be on Schedule 1 line 15 which goes to 1040 line 10.