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Leaving LLP and ongoing receivables - plan allowed?


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A doctor is leaving his LLP group. He will receive a buyout over time for his equity interest in the partnership. In addition, he will be receiving his net realizable value of the receivables over the next 24 months. This is for work that he did while with the group and it will be taxed as ordinary income.

CPA thought that he could set up a SEP for this income. I do not think this would constitute earned income for self employment purposes as there is no trade or business being carried on by him. He has already performed the service while a partner with his former LLP. I don't see how he could set up a separate plan for this. I also don't see how he could continue to participate in his LLPs plan as his service has ended.

Comments?

DMH

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  • 2 weeks later...

I agree that he can't set up a plan of his own on this income as you outlined.

It may, however, be possible for him to continue to participate in the LLP plan. But, it requires for them to permit participation without any hours requirement and may require special terms regarding end of year employment status. Typically we don't see this happen because of the cost of making it nondiscriminatory. But, in a partnership with few, if any, non-partners, it could work.

Note - I am not making a recommendation, just offering something for you to consider. Under the tax rules, the concept of a partner separating from service is murky at best. So, it offers room for interpretation.

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