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I think this will be the last year I can get away with not using a tax professional, but I'd love to go one more year before I have to. My wife (filing jointly) is currently freelance consulting. Let's say she made 20k freelance consulting last year, cause round numbers are easier. She has a proper business license under the name of her consulting company, but for simplicity, has not yet created an S-Corp. She has also opened a Solo 401k under this name (which she hasn't funded yet - this is its first year).

In the course of freelancing, she discovered that several clients were after very similar things, and decided to start working on a side project that turned into a startup idea, which she's poured a decent amount of money into, mainly in the form of hiring temporary contract work (no other actual employees besides herself). This startup currently exists as a "dba", and has made no money yet (in fact, it's made significant negative money so far). Let's say in the interest of round numbers, she spent 10k out of pocket on it last year.

In this scenario (accurate except for the numbers, which I made up), clearly she can write off the 10k in business expenses, but after that, can she still contribute 18k to the solo 401k? Or will the IRS consider the two to be the same business, and the deduction reduce the amount of "income" she will be seen to have made, and thus the amount she's eligible to contribute? If the latter, would it be different if the startup were converted to an S-Corp?

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for a sole proprietor, it doesn't matter how many clients the money comes from. The sole proprietor had (in your example) $10k in expenses and $20k in income, netting out $10k (after expenses). One could then contribute 25% of this net income (or $2.5k) to a Solo 401k, which would result in a taxable income of $7.5k.

the assumption above is that the $20k in income comes in the form of 1099's from her clients, showing tracability of the income and receipts for tracability of the business expenditures.

Given your joint financial situation, it may be advantageous to contribute to a Roth IRA using after tax money. You have to run the numbers with your specific (joint) income and tax situation. It gets complicated.

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  • No, I know the difference between Roth and not, that's irrelevant to the question - I make plenty of income on my side in a more traditional way, but regardless, the issue was entirely whether she could contribute the full amount to her own 401k or not, which it sounds like, not. If she properly split off the business that was currently losing all the money into an S-Corp, though, then she would be able to claim both the deductions and still contribute the full 18k?
    – neminem
    Commented Feb 8, 2018 at 0:00
  • (That said, I also believe that you're wrong she would only be able to contribute 2.5k - if it is true that you could only contribute the total net of all your profits - expenses across multiple dbas, she would still have 10k profit in that example, and should still be able to contribute up to 10k on the "employee" side, and would only have to think about contributing on the "employer" side once she'd hit that cap...?)
    – neminem
    Commented Feb 8, 2018 at 0:03

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