Three Adopting Employers - What "Comp" To Use?

[Guest Partly Cloudy]

A DB plan has been started for a husband and wife. They are 50/50 owners in 3 businesses and each business adopted the plan. One business is an S-Corp and they take a wage of $80,000 each, another is an LLC with income of $375,000 and the third is a partnership with income of $70,000.

I have never had this type of situation and I'm looking for some help/input here. My initial thought was to combine the incomes from the three businesses to use in determining the DB contribution and then the CPA can determine how to divide the deduction between the businesses. Any responses are greatly appreciated (including what questions I should be asking that I have not even considered).

[Blinky the 3-eyed Fish]

Because you are splitting the earnings into compensation, 1/2 SE taxes and the appropriate deduction for each entity, there is no way the CPA can decide how much to deduct from each entity. That is your job.

But you are correct that you will combine the salary/net earned income from each entity, plan document nothwithstanding, since all adopted the plan. When you determine the deduction for each entity, you will be able to determine the NEI for the LLC and partnership. This is of course a circular calculation. Depending on the DB deduction, you very well could be over $200,000 in total compensation.

[Guest Partly Cloudy]

Blinky, are you saying I have to do 3 separate calculations, one for each entity?

[Blinky the 3-eyed Fish]

You actually have more than 3 calculations. You need to determine the deduction for each entity and the deduction for both the husband and wife within the LLC and the partnership. From that you can calculate the net earned income for both the husband and wife from the LLC and partnership. Add this to the salary from s-corp and you have each's compensation. Of course this is a circular calculation so have a spreadsheet that will peform the iterations.

[Guest Partly Cloudy]

Thank you for this help. Let's see if I get it though. So, I run a val for the LLC and another for the partnership. That yields each person's deduction and therefore the "comp" for the husband and the wife from the LLC and from the partnership. Then, I take those "comp" numbers and add them to their S-Corp wages and run the val which will determine the final (overall) contribution and which the Schedule B will be based on. Since I know the allowable deductible contribution amount for each person for the LLC and for the partnership, the remaining amount will be attributable to the S-Corp.

Is that the procedure? That's three val runs so I am wondering what I'm missing?

[Blinky the 3-eyed Fish]

No, you only run one valuation. How you split up the deduction is based on what is reasonable. Isn't there an actuary you can talk to at your firm?

[Guest Partly Cloudy]

If there was somebody I could talk to, I wouldn't be wasting peoples time on this message board.

[Blinky the 3-eyed Fish]

Before I try and explain further, do you understand the concept that with a sole proprietor or partnership, the earned income is based on the deduction and the deduction is based on the earned income. In other words, you have a circular calculation that requires iteration? If so, can you set up a spreadsheet to perform the iterations?

BTW, I knew someone named Sunny once and I have heard of people named Rain.

[Guest Partly Cloudy]

I understand, Net Sch C - 1/2 SET - Contribution = NEI(comp) but you need NEI to determine the contribution and on and on. The valuation software I use performs that calculation. That is why I refered to running a val for the LLC and the partnership. Thanks.

[Blinky the 3-eyed Fish]

Running a valuation using just one entity could in many situations give you a false result for the deduction attributable to that entity.

Your next step is to try and figure out how the total contribution is being generated. Is it purely from normal cost, did the plan hit a full funding limit, are there bases or a credit balance? Based on that answer, you need to come up with a reasonable way to allocate costs between the entities. Then set up a spreadsheet to work with your valuation system to arrive at the answer.

Unfortunately, it's tough to provide specific help over these message boards.

[Guest Partly Cloudy]

Thanks. As you said, we're talking about doing something reasonable here. I would be surprised if there were specific IRS guidelines on this type of situation. In my case, being the first year and using Ind Agg, the cost is the sum of the NC's. The combined "comp" exceeds 200K. I am probably going to divide up the contribution/deduction based each entities contribution using only "comp" from that entity as a percent of the total of the sep. vals. Obviously, the sum of the three vals exceeds the total val with comp limited to 200k. If the combined comp did not exceed 200k then the total of the three separate vals would be the same as the one val using combined comps. Does that seems reasonable?

[Blinky the 3-eyed Fish]

Yes, you have it exactly.

[Guest Partly Cloudy]

Thank you very much for your help.