Cash Balance Plan Sole Proprietor Calculation [5 Step Process]


If your business is structured as a sole proprietor, we will need your business profit annually in order to calculate your funding range. This article will give you some tips regarding calculating your net business profit.

If your business is an S-Corporation or C-Corporation, you will use your W2 compensation and not your business profit. Please click here for instructions on how to report your compensation to us.

Remember that your cash balance plan funding is determined based on your net profit and not your gross revenue. For example, if your business has gross revenue of $10 million and a profit of $1 million, you would only report to us the $1 million profit.

When reporting your sole proprietor net profit to us, make sure you do the following:

  • Review your profit calculation to make sure it is complete and accurate.
  • Make sure you consider adjustments for depreciation, meals & entertainment and any other items.
  • Exclude any retirement plan contributions made (401k, defined benefit plan, or other qualified plan).
  • If possible, review your P&L with your CPA or tax advisor.

Options when reviewing and reporting net profit to us:

Accounting P&L Statement

Many business owners use Quickbooks or other software packages to track and report accounting information. Some business owners will review bank statements monthly or annually.

Whichever process is utilized, you must report gross revenues and expenses (broken down by certain categories) to the IRS. But we are only interested in your taxable net profit.

Again, make sure to make any adjustments for depreciation and meals and entertainment. Also, make sure to exclude all retirement plan contributions.

We do not need to see your detailed P&L statement. Some clients will attempt to send us a P&L and request that we calculate your net profit. Please realize that it is not our job to review or “audit” your P&L. You should have your CPA or tax professional review and address any accounting concerns you have.

Reported Net Profit on Schedule C

As a sole proprietor, you are required to report your revenues and expenses on Schedule C to your individual tax return. The net profit calculation is calculated and reported on line 31 of Schedule C.

Please realize that we do not need to see a copy of your Schedule C. See the below graphic:

Sole Proprietor Cash Balance Plan Qualifications

The following business types will generally qualify for a sole proprietor cash balance plan:

  • The owner of an unincorporated business that has no qualifying employees (except spouse).
  • An LLC with only one member and no qualifying employees (except spouse).
  • Owner of a business who meets the above criteria and employs part-time employees who work less than 1,000 hours annually, were just hired during the applicable year, or are under the age 21.

Final thoughts

A cash balance plan is like a pension but with a few differences. It’s employer-sponsored, just like a traditional pension, and it provides employees with the option for a lump sum payment upon retirement.

Each eligible employee has an individual account with the projected lump sum amount they should receive upon retirement, with the option to select a lump sum payment (assuming there are sufficient assets) or a lifetime annuity payment.

The plan contributions grow tax-free, but like a traditional retirement plan, withdrawals are taxed at the current tax rate.

Paul Sundin

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