Is Accrued Profit Sharing Tax Deductible? 25% Cap and Deadlines

An accrued profit-sharing contribution is tax deductible in the year it is booked as a liability, not the year cash actually moves, provided the employer deposits the funds into the plan trust by the due date of its federal income tax return, including extensions. That rule lives in Internal Revenue Code Section 404(a)(6), and it gives businesses a runway of several months after year-end to fund the contribution while still claiming the deduction on the prior year’s return.¹ To get the deduction, you have to hit the right deadline for your entity type, stay under the 25% compensation cap, and fix the liability before the tax year closes.

How the Deemed-Paid Rule Works

Under Section 404(a)(6), an employer is “deemed to have made a payment on the last day of the preceding taxable year” when two conditions are met. The contribution must be on account of that preceding tax year, and it must be paid to the plan trust no later than the due date of the return for that year, with extensions.¹

The rule also carries an allocation requirement. Participant accounts have to reflect the contribution as belonging to the earlier year. If the employer deposits the money on time but allocates it to the current year, the deemed-paid rule does not apply and the deduction shifts forward.²

This treatment applies to both cash-basis and accrual-basis taxpayers. A cash-basis business that writes the check in March can still deduct the contribution on the prior year’s return, which is a specific statutory exception to the normal cash-basis timing rules.

Funding Deadlines by Entity Type

Because the funding deadline follows the tax return due date, it depends on how the business is organized. For calendar-year filers:

C-corporations filing Form 1120: April 15, extended to October 15 with a timely Form 7004.³
S-corporations (Form 1120-S) and partnerships (Form 1065): March 15, extended to September 15 with Form 7004.³
Sole proprietors filing Form 1040: April 15, extended to October 15.⁴

The March 15 date catches S-corp and partnership owners off guard. A contribution deposited on March 16 without a filed extension belongs to the current tax year, not the prior one. Form 7004 costs nothing and takes minutes, so filing one as a safety net is a reasonable habit even when you plan to fund early.

The 25% Deduction Cap

Meeting the deadline is only half the equation. Under IRC Section 404(a)(3)(A), the maximum deductible contribution to a profit-sharing plan is 25% of the total compensation paid or accrued during the tax year to all participating employees.¹

Amounts over the cap are not lost. The statute lets the excess carry forward and be deducted in later tax years, in order. In any future year, though, the total deducted (carryforward plus new contributions) still cannot exceed that year’s 25% cap.¹

Employers maintaining both a defined benefit pension plan and a profit-sharing plan run into a combined limit. The total deducted across all plans cannot exceed the greater of 25% of total compensation or the amount needed to satisfy minimum funding for the defined benefit plan.¹

2026 Compensation and Contribution Limits

The 25% figure runs against compensation, but only so much of any one employee’s pay counts. For 2026, the compensation cap per employee is $360,000.⁵ An employee earning $500,000 counts as $360,000 in the 25% calculation.

Total annual additions to any one participant’s account in a defined contribution plan also cannot exceed $72,000 for 2026 under IRC Section 415(c). That ceiling covers employer profit-sharing contributions, employee elective deferrals, and any other employer contributions combined.⁵ Only employer contributions count against the Section 404 deduction ceiling; employee deferrals do not.

Fixing the Liability Before Year-End

For accrual-basis taxpayers, claiming the deduction in the prior year takes more than intention. Under the all-events test in IRC Section 461, a liability is not incurred until all events have occurred that fix the fact of the liability and the amount can be determined with reasonable accuracy.⁶

In practice, that means the board of directors or owners passes a written resolution before fiscal year-end committing to a specific contribution. The resolution should identify the dollar amount or the formula, name the plan, and state the tax year the contribution applies to. A vague statement of intent to “consider” a contribution later will not satisfy the test. As of December 31 for calendar-year filers, the commitment must be unconditional.

The plan document itself has to authorize discretionary employer contributions. If the plan provides only for mandatory contributions at a fixed rate, a resolution setting a different amount would conflict with the plan terms. The allocation formula in the plan document must be applied uniformly to all eligible participants, consistent with nondiscrimination requirements.

Missing the Deadline

A contribution not deposited by the extended due date does not disappear. The deduction simply moves to the year the contribution is actually made, subject to that year’s 25% cap.²

That shift creates real trouble if the business already filed and claimed the deduction on the prior-year return before the contribution actually posted. The employer would need to amend the return and pay any additional tax plus interest. The deduction is valid only when the money is in the trust by the deadline.

Excise Tax on Nondeductible Contributions

Going over the deductible limit triggers a 10% excise tax on the nondeductible portion under IRC Section 4972. The tax falls on the employer and is measured against the nondeductible amount as of the close of the employer’s tax year.⁷

Employers report it on Form 5330. Filing Form 5330 late costs 5% of the unpaid tax for each month the return is late, capped at 25%. Late payment adds a separate 0.5% per month, also capped at 25%.⁸

The carryforward provision limits the exposure. Deducting a $5,000 excess in the following year drops the nondeductible balance and the excise tax with it. Still, the 10% applies each year a nondeductible balance sits on the books, so clearing excess contributions quickly matters.

Self-Employed Owners Calculate Differently

Self-employed individuals cannot simply apply 25% to gross income. The contribution itself reduces the compensation base, creating a circular calculation. A sole proprietor first reduces net earnings from self-employment by the deductible portion of self-employment tax, then applies a reduced contribution rate that accounts for the contribution being subtracted from its own base.⁹

The effective maximum works out to roughly 20% of net self-employment income rather than the full 25%. IRS Publication 560 provides the rate tables and worksheets. Self-employed contributions are deducted on Form 1040, Schedule 1, not Schedule C.⁹

1
Office of the Law Revision Counsel. 26 USC 404 – Deduction for Contributions of an Employer to an Employees Trust or Annuity Plan and Compensation Under a Deferred-Payment Plan
2
Internal Revenue Service. Issue Snapshot – Deductibility of Employer Contributions to a 401(k) Plan Made After the End of the Tax Year
3
Internal Revenue Service. Publication 509 (2026), Tax Calendars
4
Internal Revenue Service. SIMPLE IRA Tips for the Sole Proprietor
5
Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs, as Adjusted for Changes in Cost-of-Living
6
Office of the Law Revision Counsel. 26 U.S. Code 461 – General Rule for Taxable Year of Deduction
7
Office of the Law Revision Counsel. 26 U.S. Code 4972 – Tax on Nondeductible Contributions to Qualified Employer Plans
8
Internal Revenue Service. Form 5330 Corner
9
Internal Revenue Service. Self-Employed Individuals – Calculating Your Own Retirement Plan Contribution and Deduction