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Keogh contributions not deductible for self-employment tax.

Keogh Contributions Not Deductible for Self-Employment Tax

The District Court for the Northern District of Illinois has recently reaffirmed that Keogh plan contributions are not deductible from business gross income for purposes of the self-employment tax. Such contributions are allowed, instead, only as an adjustment in computing an individual's adjusted gross income.

For the 1984 tax year, Mr. Gale contributed $7,031 to a Keogh retirement plan. On his 1984 return, Gale deducted this amount on Line 27, Form 1040, as an adjustment to income. Also filed in that year was a Schedule C which detailed the profit derived from Gale's business. The expenses shown on Schedule C did not include the contribution to the Keogh pension plan.

In 1988, Gale filed an amended 1984 return. On this return, Gale reported the pension contribution as a business expense on Schedule C rather than an adjustment to income on Line 27 of Form 1040. The result of this change was a reduction in self-employment tax of $795. The IRS disallowed the claim for refund, explaining that contributions to Keogh plans are not adjustments to self-employment income.

In holding against the taxpayer, the court granted a motion to dismiss the case, agreeing with the IRS that a Keogh contribution "is not a business expense but is a transfer of business profits from the business to the owner." The benefit of the contribution accrues to the self-employed individual, not to the business.

The court found that, although Congress has sought to eliminate most of the distinctions between the contributions of a corporate employer and a self-employed individual to qualified pension plans, "the legislative scheme does not show a congressional intent to allow the deduction claimed by the taxpayer."
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Title Annotation:individual retirement accounts
Publication:The National Public Accountant
Article Type:Brief Article
Date:Sep 1, 1991
Previous Article:IRS matching program information released.
Next Article:What's it all about?

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