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I have a owner only plan where the owner has two sole proprietor business that have both adopted the plan. For 2007 his net Schedule C for business 1 is $150,000 and his net Schedule C for business 2 is ($200,000). Would the correct way to handle this be to use a combined net Schedule C of $150,000 ($150,000 for business 1 and $0 for business 2) and to instruct the owner that only business 1 can take a tax deduction for the contribution (in case that wasn't obvious)?

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I have a owner only plan where the owner has two sole proprietor business that have both adopted the plan. For 2007 his net Schedule C for business 1 is $150,000 and his net Schedule C for business 2 is ($200,000). Would the correct way to handle this be to use a combined net Schedule C of $150,000 ($150,000 for business 1 and $0 for business 2) and to instruct the owner that only business 1 can take a tax deduction for the contribution (in case that wasn't obvious)?

IMO, the net income is loss of $50,000, so no pension deduction for owner. Still required pension contribution for 412 must be paid, just not deducted.

This result sucks, but the combined businesses will result in negative income on the individual's 1040.

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It sounds as if the same sponsor adopted the plan twice. Isn't there a single entity which is was SCA's implied position?

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

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Andy, I made a mistake saying that both businesses adopted the plan. He is a sole proprietor so all C's are included. Do you have any input on my actual question though?

Concur with SCA. If I'm self-employed, I am one entity so Schedule C income's are agregated just as they are on front of 1040. Client would only file one 1040 would he not?

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

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Almost. With respect to the ability to claim a deduction, I certainly concur. However, the plan could very well define compensation in a way that results in this individual getting credit for $200,000. Yes, I know this would be at odds with his 415 compensation (which would require aggregating) and therefore if a DC plan the annual additions limit would be zero, but in the case of a plan which uses average compensation there might, just might, be some use of the individual Schedule C's income. If, for example, you had a DB plan that was set up specifically to include compensation from the entity which was covered by Schedule C #1 and specifically to exclude compensation from the entity which was covered by Schedule C #2, there could be a reason, or two, to use the bigger number without offsetting it by the loss.

On a more practical level, however, and in the absence of such a particular set of facts, I agree with what has been posted.

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Almost. With respect to the ability to claim a deduction, I certainly concur. However, the plan could very well define compensation in a way that results in this individual getting credit for $200,000. Yes, I know this would be at odds with his 415 compensation (which would require aggregating) and therefore if a DC plan the annual additions limit would be zero, but in the case of a plan which uses average compensation there might, just might, be some use of the individual Schedule C's income. If, for example, you had a DB plan that was set up specifically to include compensation from the entity which was covered by Schedule C #1 and specifically to exclude compensation from the entity which was covered by Schedule C #2, there could be a reason, or two, to use the bigger number without offsetting it by the loss.

On a more practical level, however, and in the absence of such a particular set of facts, I agree with what has been posted.

Mike, you appear to be considering as two entitities Siamese twins that have not been separated.

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

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For whatever it is worth, here is what the ERISA Outline Book says,

"If a self-employed individual is engaged in more than one trade or business, the earned income of each trade or business is determined separately, according to Treas. Reg. 1.401-10(b)(2). For example, if one business produces earned income of $50,000 and the other business produces a loss of $60,000, the individual does not net the earned income of the two businesses. The $50,000 of earned income from the first business may be used to support a qualified plan contribution ...

"IRS apparently agrees with interpretation ...

"Note that some commentators take the position that a net loss must be offset against the net gain, so that a self-employed individual has less earned income taken into account under the qualified plan ... we feel that IRC section 401(d) and Treas. Reg. 1.401-10(b)(2) support the conclusion that a net loss should be treated as "zero" compensation, not as negative compensation."

This perspective seems to be contrary to the consensus on this forum. I hope someone can chip in and clarify.

PensionPro, CPC, TGPC

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For whatever it is worth, here is what the ERISA Outline Book says,

"If a self-employed individual is engaged in more than one trade or business, the earned income of each trade or business is determined separately, according to Treas. Reg. 1.401-10(b)(2). For example, if one business produces earned income of $50,000 and the other business produces a loss of $60,000, the individual does not net the earned income of the two businesses. The $50,000 of earned income from the first business may be used to support a qualified plan contribution ...

"IRS apparently agrees with interpretation ...

"Note that some commentators take the position that a net loss must be offset against the net gain, so that a self-employed individual has less earned income taken into account under the qualified plan ... we feel that IRC section 401(d) and Treas. Reg. 1.401-10(b)(2) support the conclusion that a net loss should be treated as "zero" compensation, not as negative compensation."

This perspective seems to be contrary to the consensus on this forum. I hope someone can chip in and clarify.

This is interesting BUT suppose you had two Schedule C's each with 100K net income. Would you figure SS self-employment taxes separately, so that you effectively paid self-employment tax of about $30,000 rather than about $18,000 (if net earnings were aggregated)?

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

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The short answer is that I believe you aggregate earnings for calculation of SE tax. However, for plan compensation purpose, you do not aggregate.

I see. Then when your determining earned income by substracting off 1/2 SSE, what do you subtract????

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

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The short answer is that I believe you aggregate earnings for calculation of SE tax. However, for plan compensation purpose, you do not aggregate.

I see. Then when your determining earned income by substracting off 1/2 SSE, what do you subtract????

The SE tax calculation is not directly and completely related to the plan compensation. Here is a real life example.

We had a doctor whose profession on his tax form was "doctor/farmer." He had a ($110,000) net loss on his Schedule F, and a $150,000 net profit on his Schedule C.

We netted his income for SE tax calculation, because as per Schedule SE instructions, you use profit or loss from Schedule F on line 1, and profit or loss from Schedule C on line 2 of Schedule SE. For plan compensation, we used his net Schedule C profit of $150,000 only and subtracted the SE tax calculated as per instruction for Schedule SE (i.e. netting the compensation). The administration software was not able to handle this without hand holding.

Even though we were dealing with a Schedule C and Schedule F, I believe the logic would apply with multiple Schedule C's.

PensionPro, CPC, TGPC

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I'm sorry, I was on the example of two Schedule C's with 100K income each, not back at your original example of profit v loss. It just seemed that whatever applied in your example would apply in the example I posed and I simply cannot see an answer.

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

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  • 14 years later...

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