Form 1065, Schedule K-1

[Belgarath]

Suppose you have an LLC, taxed as a partnership. Therefore, the pension contribution is calculated based upon the earned income. This would normally be the line 14a on the Schedule K-1, and then you take the 1/2 SE tax reduction, and perform the reduced earned income deduction.

A question came up on this, and since I don't do tax filings, I'd like to solicit opinions. Apparently, the CPA is saying that the contribution (let's say 40,000) on behalf of the partners should be on Line 13, and therefore the line 14a figure is already reduced by the 40,000. For example, if the earned income after the 1/2 SE tax reduction is 180,000, and the partner will receive a 40,000 contribution, the CPA is saying that the Line 14a should be 140,000, not 180,000.

This doesn't seem right to me. As I read the Schedule K-1 instructions for line 13, yes, it does seem that the 40,000 should be reported here, but this is so the partner can deduct the 40,000 on his 1040. It does NOT seem to me that it should reduce the Line 14a amount.

Any thoughts on this? Thanks!

[Bird]

You're right, 14a should be the gross amount. I'm not an accountant, so don't know what my opinion is worth, but I've seen a bunch of these and talked to a lot of accountants...have seen it done wrong a lot too.

Maybe the CPA is thinking that the numbers on the K-1 are supposed to add up? If I understand correctly, they are just a bunch of numbers that are calculated independently.

[mbozek]

I dont know if there are any special rules for LLC deductions for owners but pension plan contributions for partners are included as taxable comp on the K-1 and the pension contribution for the partner reported in a separate box. The partner includes the taxable comp on line 13 of the 1040 and then deducts the contribution on line 30 and takes the deduction for 1/2 of the FICA tax on line 28.

[SoCalActuary]

Several years ago, Larry Starr wrote a complete piece on earned income for an ASPA presentation. Find it if you can.

If the CPA takes the pension deduction on the return of the LLC, then the K-1 has to reflect passthru of the pension contribution as income back to the member, so they can take the deduction on their 1040. I just don't remember what line it is entered on the K-1 form.

[mbozek]

See instructions for 1065 form. Line 13 code R is the amount of the pension contribution for the partner. Line14a is net earnings from SE which according to the worksheet for line 14 is not reduced for the pension contribution because the partner takes such deduction on line 32 of his 1040. In your example line 14a is 180,000, line 13 code R is $40,000. The 180k is entered on line 13 and the 40k is entered on line 32 of the partners 1040. The partners FICA tax liability is computed on form SE and deducted on line 28 of the 1040. The LLC reduces its income by 180k.

[Belgarath]

Thanks all.

[Guest merlin]

A related question.

I'm looking at a 2004 K-1 that shows 2 entries on line 14. The partner has code A net earnings from SE of $85384, and code C gross non-farm income of $721059. How do the 2 #s relate? How do they factor into the computation of the partner's deduction?

Thank you for any help.

[BeckyMiller]

Merlin - The gross income number is just a disclosure made for purposes of other tax limitations. For example, the rule allowing a farmer to make annual deposits, rather than quarterly tax deposits is based upon the percentage of his or her gross receipts from farming over total gross receipts. Gross receipts are attributed out to a farmer partner from a partnership. Hence, this disclosure would be relevant.

All you need is the net earnings from self-employment figure (and the applicable adjustments for S/E tax, etc.) to do the plan work.