Tax Deferral and How to contribute to solo 401k

[Bryan O.]

As tax season is approaching, I'm trying to find more ways to reduce my taxable income to get down to the more favored brackets.

If I have passive income (rent) coming into an LLC, can I pay myself a management fee to count as income to invest into the solo 401k? It sounds like this strategy means I show regular taxable income, then put it into tax deferred, which is really net 0 gain. This seems a good way to grow the 401k, but not reduce or defer taxes.

My solo 401k plan includes profit sharing. Is there a way to leverage profit sharing to reduce my taxable income?

Quickly into active income: is self-employment income based on gross? Or net? i.e. I make $20 consulting, but spend $10 on advertising and other expenses. Can I contribute $20 or $10?

Are there any strategies that make sense to reduce my taxable income? I cannot qualify as a RE Pro, nor can my wife. Maybe next year she can, but not currently. Other thoughts? I would really like to wield the 401k to it's highest potential, but as additional/alternate strategies I can max non-Roth IRAs and do charitable donations. All your thoughts welcome and appreciated!

@Dmitriy Fomichenko

@Brandon Hall

@Linda Weygant

[Brian Eastman]

@Bryan O.

Passive income from rents does not qualify for 401k contributions, and changing that passive income to earned income subject to self-employment taxes is not generally a good formula. There are also issues with trying to pay yourself AND have passive income in a sole proprietorship or LLC. In a S-Corp, you can have wages separated cleanly, but that is a different ball of wax and not generally applicable to rental holdings.

On the active income, you can contribute with profit sharing up to 20% of your net business income.  This is defined as the gross income, minus expenses, minus the employer's 50% of the payroll taxes.  So with $20 earned and $10 in expenses, you could contribute about $1.85 using profit sharing.  

For employee deferrals, you can contribute up to $18,000 of your declared income ($24K if you are age 50 or older), which would be the net operating income less the full 15.3% of employer and employee self-employment taxes.  

So the profit sharing is a touch more tax-efficient, but limited at 20% of net income.  If you are looking maximize on a minimal amount of income, you will want to use both types of contributions.

Speak with your licensed tax advisor to determine the best formula in your situation.