How to get the most out of deductible meals

In this month’s video, I explained what types of business meals are deductible.  Since meals can be frequent and for small dollar amounts, I get more questions about tracking these receipts than any other expense.  In the case of travel meals, an IRS rule allows you to throw those receipts all away.  Instead of tracking and deducting each specific expense, you can deduct a per diem rate for your travel meals. Continue reading

Backdoor Solo-401k plans

It happens every year:

  • Doctor is being paid by 1099 for extra shift work or locums.
  • Doctor is covered for retirement at her day job – doesn’t know a 2nd plan may be an option.
  • Doctor is looking for ways to reduce her income while filing her taxes.
  • Doctor finds White Coat Investor – in July!

If a similar situation has happened to you, don’t despair! You can still fund a solo-k via the back door.

Here’s how:

  1. Open a SEP IRA account in the current year for the prior year. You have until the due date of your income tax return, including extensions (October 15 for individuals), to do this.
  2. Contribute 20% of net profits from your IC work (less ½ FICA taxes) to your SEP. This deadline with an extension is also 10/15 if you file for extension.
  3. Open a solo-401k account.
  4. Roll the SEP balance into the solo-401k account.
  5. Close the SEP account and contribute to the solo-401k in the current and future years.

And there you have it – you have just funded your new solo-k via the “back door”. We’ve used these steps to ensure physician business owners have that solo-k space even when they become clients after year-end. Below are some questions about this technique that pop up on the WCI forum and from new clients…

Will I have to pay pro-rata taxes? After all, a SEP is an IRA!

No, as long as you close the SEP and transfer the balance into the solo-k before 12/31. Or you can wait until the following year to make the backdoor conversion and close the SEP in the following year. Remember, you owe pro-rata taxes only if you have an IRA balance on 12/31. An IRA balance on any other day of the year is irrelevant.

What if I’ve already filed my income tax return without the SEP?

As long as it’s October 15 or earlier, you can amend your income tax return for the SEP contribution.

Do I have to make the SEP contribution before I file my taxes?

No. If you’ve filed an extension, you can contribute to the SEP at any time before 10/15. It makes no difference in what order you file your return or contribute to the SEP.

Does the custodian matter?

This is one situation in which you should not use Vanguard. They do not allow rollovers into their 401k’s.

What if I’m not doing any IC work in the current year?

Per Title 26 Code 401(c)(B), if you have been a self-employed individual in any prior year, you are eligible to adopt a one-participant 401k. (I got this tip from @spiritrider, who I consider the most knowledgeable tax code person on the WCI Forum.)

What if last year’s income was a one-off and I don’t plan to do IC work ever again?

The IRS intends that 401k plans are semi-permanent and considers a sole proprietorship to exist from the first year of profitable operation until death. So the mere fact that you do not have current earned income from that business does not mean that the sole proprietorship ceases to exist. In fact 401(c) explicitly states that you are a self-employed individual if you have had earned income from self-employment in any prior year. (I also lifted this from a response by @spiritrider on the WCI forums.)

Planning to Maximize Your Section 199A Deduction

TCJA (Tax Cuts and Jobs Act) 2017 took away employee business expenses, along with much of our ability to itemize. In particular, we can now deduct mortgage interest on only $750k of debt and are limited to a deduction of $10k/yr. for SALT deductions. On a positive note, the Pease Limitation – which reduced itemized deductions for high earners, is gone along with AMT for most high-income taxpayers. Continue reading