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Pension RC

"25% of compensation" limit

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I have a client who receives income on a W-2 and on a K-1. For 2017, his W-2 is $140,000 and his K-1 income is -$26,000. Do I need to subtract the K-1 income from the W-2 before calculating the 25% of compensation limit for profit sharing, or can I ignore the K-1 negative income?

 

Thanks for any responses!

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Is this a partnership (or an LLC taxed as a partnership)?  If so, there shouldn't have been a W-2 and it should be ignored.  The tax return preparer needs to recalculate the partner's total net earnings from self-employment as if the tax reporting was done correctly from the beginning.  If this is a Sub S corporation, you just ignore the K-1. 

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6 hours ago, Pension RC said:

I have a client who receives income on a W-2 and on a K-1. For 2017, his W-2 is $140,000 and his K-1 income is -$26,000. Do I need to subtract the K-1 income from the W-2 before calculating the 25% of compensation limit for profit sharing, or can I ignore the K-1 negative income?

 

Thanks for any responses!

Please provide more complete info.  OK, it's a S corp.  Is the W-2 from the S Corp?  Where did the K-1 come from?  Are you talking about an S distribution?  If so, it isn't earned income and is ignored and only the W-2 matters.  More complete info always gets better answers.

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If you're not sure which you're looking at, the K-1 for a partnership will be identified as Form 1065 and for an S-corp will be Form 1120S.

(Edit: the K-1 will be identified as an attachment to one of those forms. Not trying to suggest that the entire form is the K-1. Just to be clear)

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You only count the W-2 from the S corp, since that is the only compensation for services. What comes out on the K-1 from the S corp is his share of the S corp's income (or, in this case, apparently a loss) after comp has been paid.

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