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Contributing to SEP and PSP in same year


mjf624

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Hello,

I have a client that had a business with employees and maxed out his profit sharing / 401k for 2016 ($59,000.) He sold business and terminated plan prior to end of 2016.  He then received consulting income from the company that purchased his business as a 1099 consultant.  Can he contribute under a SEP - consulting income and max this contribution for 2016 also?  Thank you.

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I would say "no" because he did own part of that business during the year.  There "may" be an argument that in order for a controlled group to actually exist, that the businesses must exist at the same time, but that would appear aggressive.  Ideally, if someone has sold a business close to the end of the year, then they would not receive the discretionary contribution (assuming discretion) necessary to reach the $59,000 limit.  It would be convenient for them to 'double up' on the limit for income derived from "the same business".

There may be a another argument of a Management Group since 100% of his consulting revenue came from the business that he owned during the year.

I'm just shooting from the hip with reasons that I wouldn't do it :-)  Others may articulate a well documented pattern to show a direct conflict with the rules.  Then again, someone else may present an argument to suggest it can be done.  I'm just saying with "what I know off-hand" that I wouldn't do it.

Good Luck!

CPC, QPA, QKA, TGPC, ERPA

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20 minutes ago, ETA Consulting LLC said:

I would say "no" because he did own part of that business during the year.  There "may" be an argument that in order for a controlled group to actually exist, that the businesses must exist at the same time, but that would appear aggressive.  Ideally, if someone has sold a business close to the end of the year, then they would not receive the discretionary contribution (assuming discretion) necessary to reach the $59,000 limit.  It would be convenient for them to 'double up' on the limit for income derived from "the same business".

There may be a another argument of a Management Group since 100% of his consulting revenue came from the business that he owned during the year.

I'm just shooting from the hip with reasons that I wouldn't do it :-)  Others may articulate a well documented pattern to show a direct conflict with the rules.  Then again, someone else may present an argument to suggest it can be done.  I'm just saying with "what I know off-hand" that I wouldn't do it.

Good Luck!

Great thanks for the help!

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Assuming 50% or more owner of business he sold, he has an annual aggregated 415 limit with any other "business" he owns 50% or more - including self employment income - so without a doubt he absolutely cannot do SEP in same year on that income.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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I'm not so sure about that. Maybe I'm misunderstanding what you are saying, but the "replacing 80% with 50%" modification, for 415 purposes, applies ONLY to 1563(a)(1) parent-subsidiary groups. Doesn't sound like that is the case here.

If both entities were corporations, and they did not exist at the same time for any period whatsoever, then I would assert that there is no controlled group. Now, if one business was unincorporated, for example, then that's a different situation.

 

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Belgarath, so some guy owns 70% of 2 businesses, there are 2 separate 415 limits for 2 separate plans (assume no overlap in ownership on the other 30)?

I looked at the regs and it sure does seem that way.  It seems to me that at least in the small business world, where frankly we don't see parent/sub relationships, this rule is "almost" moot.

 

Austin Powers, CPA, QPA, ERPA

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Reminds me of a story from long ago.  A lawyer representing super-talents would create multiple organizations that were 79.99% owned by the talent and 20.01% owned by unrelated individuals. Who were the individuals?  Why, the lawyer's law partners (as individuals).  Big, big law firm so no control. How did I find out? When an accountant for one of the entities was unhappy with the TPA and we took over a case that had the same super-talent as a participant as another plan of ours. To make it "legit" the plans each had both as benefitting (and this was before 401(a)(26) made it mandatory, I think).  Sweet little deal for the lawyer's partners (between the "compensation" they were paid and the benefits).

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Well, partnerships really never own corporations in the samll business world (never ever say never).  Hmmm... How about a 1040 Schedule C guy who also owns 70% of a partnership?  One limit or tow?  How about if it was a corporation?

Seems like there is a trap for the unwary somewhere!

For example, in my example in my prior post, would the ownership of one company be attributed tot he other thus resulting in a parent sub relationship after attribution.  You get the idea.

Austin Powers, CPA, QPA, ERPA

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So normally when someone gets paid consulting income, the accountant will then turn around and produce a Schedule C since there is most likely some sort of expense related to the consulting company (for example, accountant's fees to prepare return.)

Therefore, for example, owned original business from 1/1/2000 and sold 8/1/16 under a S-Corp and owner made over $265,000 max comp.  Let's call this company XYZ Trucking Company.  Has 4 other employees and owner contributed max $60,000 under 4k/psp plan.  Owner (John Doe) owned 100% of this company up until 8/1/16 and sold 100% of company to national firm. 

Then paid from 8/2/16 to 12/31/16 consulting income via 1099 non employee compensation which the accountant turns into a Schedule C.   This would be called John Doe Consulting with different tax id.  Wants to max out the compensation from this company as a SEP.  John Doe owns 100% of this company.

Not sure if this helps.

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Jash, FWIW, I'm not sure we are necessarily disagreeing, but perhaps stating it a bit differently. I read it as applying to businesses under common control, but in the context of determining a parent-subsidiary common control relationship for 415 purposes.

For example, if I own 100% of corp A, and individually am a 55% partner in partnership B/C, this is not subject to 415(h). Similarly, (according to unofficial IRS comments) if I am a sole prop, and also am a 55% partner in partnership B/C, this also does not subject me to 415(h).

If, on the other hand, I own 100% of corporation A, and the corporation itself is a 55% partner in partnership B/C, then yes, 415(h) applies, because this is now in a parent-subsidiary context, and would be considered under "common control" for 415 purposes.

Not sure what others may think. I'll be interested to hear everyone's thoughts - maybe I'm just looking at this all wrong.

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That seems to be what the regs say, they explicitly in plain English carve out brother/sister.  You do have to scratch your head and wonder what the heck they were thinking in treating your paragraphs 2 and 3 any differently since they are essentially the SAME.

Austin Powers, CPA, QPA, ERPA

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