Earned Income and 30% Limit under 1.401-10(c)(3)(i)

[Guest EMM118]

I am wondering if the 30% limit under 1.401-10©(3)(i) still applies. It states that "If a self-employed individual is engaged in a trade or business in which capital is a material income producing factor, then, under section 911(b), his earned income is only that portion of the net profits from the trade or business which constitues a resonable allowance as compensation for personal services actually rendered. However, such individual's earned income cannot exceed 30 percent of the net profits of such trade or business. The net profits of the trade or business is not necessarily the same as the net earnings from self-employment derived from such trade or business."

For example, assume a business generates $1,000,000 in income. Does this mean than only $300,000 could reasonably be considered as constituting earned income.

What about situations where a business pays an owner a management fee that exceeds 30% of the entity's income?

Thanks in advance.

Ed

[Belgarath]

I don't think so. 1.401 through 1.401-14(inclusive) reflect the provisions of 401 prior to ERISA. The reg sections following 1.401-14 and preceding 1.402(a) reflect the post-ERISA provisions of section 401.