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Where can I deduct this contribution?


Guest Whatup

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Plan Sponsor is a Corporation, of which client is sole owner. A partnership has also adopted the plan. The corporation generates losses.

He is over age 59.

Let's assume his DB plan allows a distribution from the plan.

Here's what he wants to do:

Put in his required contribution. Deduct it on page 1 of his 1040, not his corporate return.

Then take a distribution of approx. twice that amount into his Roth plan. So page 1 will show 0 earned income. a $200 k distribution from Retirement Plan, and a $100k reduction for Retirement plan contributions.

Yes? No?

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Put in his required contribution. Deduct it on page 1 of his 1040, not his corporate return.

Is the individual permitted to deduct a corporate expense?

Methinks there are facts not yet in evidence.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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There are a couple of things that I don't understand...

exactly which entity is making the contribution? The partnership? Does the partnership have any income?

What does it mean to ",,,take a distribution...into his Roth plan?"

Ed Snyder

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Guest Shrek'sconfused

I don't see what facts are needed. He is the sole owner of the corp and he can do what he wants with both entities regarding who makes a MULTIPLE EMPLOYER Contribution. No, he doesn't have income. I don't know why Shrek's donkey is needed here, because I don't think income is needed to fund a db plan if it's based on prior comp, isn't that correct?

So what's the problem with the question? How is he required to allocate a multiple employer plan's contribution? Does it have to be prorated on the formula's prior year comp (between partnership and corporation)? I'm not so sure from what I read. Or do I have some leigh way with the allocation?

As stated, he wants a 100k deduction for the db contribution on page 1 of 1040. He then wants to take 200k out as a taxable distribution, and roll it into his roth, making his AGI 100k.

Wow, I posted this 4 days ago and no one knows how you are suppose to allocate a multiple employer contribution(DB).

P.S. I was Whattup, but had to create the account to my work email address. FYI

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How about the limitation on net operating loss? How does he deduct losses attributed to plan contributions as a self employed person in excess of his net earnings on Sked C? Deductions for plan contributions can only be taken against taxable income of the plan sponsor.

If you know the answer why are you posting the Q on this board?

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Guest Shrek'sconfused
How about the limitation on net operating loss? How does he deduct losses attributed to plan contributions as a self employed person in excess of his net earnings on Sked C? Deductions for plan contributions can only be taken against taxable income of the plan sponsor.

If you know the answer why are you posting the Q on this board?

I don't know the answer. I don't know much about DB plans, but I do know that the plan administrator calculated a DB contribution of 65k, deducted on the 2006 F1120. The net loss was then reported at 120k. Recall that he is the lone employee of the corp. Also, he received 40k in comp from corp.

The partnership loss was 5k for the year. No amt deducted on page 1 of 1040.

Based upon your reply, is it a correct statement to say that a corp. can deduct a db contribution, even if it results in a loss but the self employed can not? If it is, can you give me a ballpark on your authority for that distinction please.

Also recall that for 2007 there will be no W-2 from corp, there will be a loss from corp, and a loss from partnership. If the answer regarding plan contribution deductions is "yes" then is it also a correct statement that only the corp. can deduct the contribution in 2007, irrespective of 0 w-2 comp.

We are trying to avoid deducting it on the 1120 because we will never get a benefit from the loss.

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See IRC 172(d)(4)(D) for prohibition on creating Net Operating loss which results from pension contribution on behalf of self employed person.

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Guest Shrek'sconfused
See IRC 172(d)(4)(D) for prohibition on creating Net Operating loss which results from pension contribution on behalf of self employed person.

There won't be an NOL. 200k distribution = income

100k adjustment to income for DB contribution.

= 100k AGI

Your cite only tells me that the contribution is a nonbusiness deduction, so even if there was an NOL, the S/E contribution would offset his nonbussiness income of 200k, resulting in 100k of nonbusiness income for nol.

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Guest Shrek'sconfused
Is the sole prop an adopting employer? If not, how would he be able to deduct the contribution on the 1040 rather than the 1120 even if he had a large profit?

Yes, the partnership is an adopting employer.

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Put in his required contribution. Deduct it on page 1 of his 1040, not his corporate return.

Then take a distribution of approx. twice that amount into his Roth plan. So page 1 will show 0 earned income. a $200 k distribution from Retirement Plan, and a $100k reduction for Retirement plan contributions.

Trying to get a handle exactly what you're trying to accomplish here.

$0 earned income means he may put the $100,000 into the DB plan, but it isn't deductible (no loss carryforward for a sole prop). If this continues into the future w/ no earned income, the contributions never get deducted, meaning that he is effectively converting post-tax money into pre-tax money.

Now takes out $200,000 in pre-tax money to put in his Roth, wherein he's taxed on that distribution (can't roll into a Roth IRA, have to settle taxes first). So in essence, unless there's something I'm not getting, your client is proposing to convert after-tax money into pre-tax money, then pay taxes on it again, and then finally end up in a Roth plan. What am I missing from your question?

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Guest Shrek'sconfused

Now takes out $200,000 in pre-tax money to put in his Roth, wherein he's taxed on that distribution (can't roll into a Roth IRA, have to settle taxes first). So in essence, unless there's something I'm not getting, your client is proposing to convert after-tax money into pre-tax money, then pay taxes on it again, and then finally end up in a Roth plan. What am I missing from your question?

The objective is to take as much of the deduction as an adjustment to income to offset the taxable distribution to contribute to the ROTH.

Can you give me a ballpark on authority that he can't take a DB contribution as an adjustment to income on his return with 0 earned income? I am sure you are right, I just haven't been able to support it. I am having difficulty identifying why a corporation can take the deduction with 0 income but the s/e can not.

Thank you

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The more I look at this, the less I see what the Roth conversion has to do with anything - it's a separate issue entirely. Unless the goal is really to do a $200,000 Roth conversion, but effectively reduce the tax bite to $100,000, which isn't working.

Ed Snyder

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Guest Shrek'sconfused
The more I look at this, the less I see what the Roth conversion has to do with anything - it's a separate issue entirely. Unless the goal is really to do a $200,000 Roth conversion, but effectively reduce the tax bite to $100,000, which isn't working.

The Roth has nothing to do with it, except to explain the objective of this entire scenario. We are looking for a mechanism to reduce the tax bite of the 200k as you infered from above. But as yet, no one has cited any authority as to why it's not working.

The question again: What authority prevents a S/E from taking the deduction with 0 income? I am looking for rules that will differentiate why a corporation can take the deduction with 0 income.

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Guest Shrek'sconfused
Didn't MJB offer you the cite which you then quoted?

Did you see when I quoted that cite I disagreed with him, and stated reasons why it has nothing to do with an NOL?

If you are familiar with the code and why it's applicable then please explain why it is based on my reply, primarily there is no NOL generated from calling this a non-business deduction.

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Don't have to go too much further than 404(a)(8):

(8) Pension Self-employed individuals.

In the case of a plan included in paragraph (1) , (2) , or (3) which provides contributions or benefits for employees some or all of whom are employees within the meaning of section 401©(1) , for purposes of this section —

404(a)(8)(A) the term "employee" includes an individual who is an employee within the meaning of section 401©(1) , and the employer of such individual is the person treated as his employer under section 401©(4) ;

404(a)(8)(B) the term "earned income" has the meaning assigned to it by section 401©(2) ;

404(a)(8)© the contributions to such plan on behalf of an individual who is an employee within the meaning of section 401©(1) shall be considered to satisfy the conditions of section 162 or 212 to the extent that such contributions do not exceed the earned income of such individual (determined without regard to the deductions allowed by this section ) derived from the trade or business with respect to which such plan is established, and to the extent that such contributions are not allocable (determined in accordance with regulations prescribed by the Secretary) to the purchase of life, accident, health, or other insurance;

Further, suggest you check out IRS Pub. 536. Problem is that NOL comes from the Schedule C deductions; the pension deduction (other than pension attributable to employees) is deducted on the 1040, not the Schedule C. Not an accountant (or even pretend to be one, being an actuary is dull enough ;) ), but looks like since the pension contribution is outside of the Schedule C can't carry it as a NOL, but what do I know.

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Guest Shrek'sconfused

404(a)(8)© the contributions to such plan on behalf of an individual who is an employee within the meaning of section 401©(1) shall be considered to satisfy the conditions of section 162 or 212 to the extent that such contributions do not exceed the earned income of such individual (determined without regard to the deductions allowed by this section ) derived from the trade or business with respect to which such plan is established, and to the extent that such contributions are not allocable (determined in accordance with regulations prescribed by the Secretary) to the purchase of life, accident, health, or other insurance; and

Perfect Mwyatt. That's the answer! And alas, nothing to do with NOL's.

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Guest Shrek'sconfused

Perfect Mwyatt. That's the answer! And alas, nothing to do with NOL's.

okay then, suppose this is a controlled group (the corp and the partnership). What if he has 1099 Misc income unrelated to the partnership? Does he have to amend the document to include the 1099 amounts? Or can it just be counted since it's self employment income?

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Is the 1099 income from services of the individual that are producing income? It can't be just any old 1099 income for retirement plan purposes. If so, the sole proprietorship for which the 1099 income is generated must adopt the plan.

"What's in the big salad?"

"Big lettuce, big carrots, tomatoes like volleyballs."

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Guest Shrek'sconfused
Is the 1099 income from services of the individual that are producing income? It can't be just any old 1099 income for retirement plan purposes. If so, the sole proprietorship for which the 1099 income is generated must adopt the plan.

That's what I thought. Service from individual producing the income. I guess I would need to add John Smith, Sole Proprietor as an adopting employer of the plan.

I don't have any other reasons to bother your retirement community, probably for the remainder of the year.

Thank you

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At the risk of offending Shrek, this is covered in IRS publication 560, in IRC 401, in IRC 162, and in every important DB textbook.

Read Larry Starr, who has lectured on this subject, or Kevin Donovan. Both have tax credentials (EA & CPA respectively) and have done the research.

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