schedule K1 income

[eilano]

We have an LLP (taxed as a partnership). For 2005, the owners received a W2 and Schedule K1 income and are looking for us to add the two amounts together to get the plan compensation. We think the W2 compensation should be changed from W2 income to schedule K1 income. Is this correct? What should be used as plan compensation?

[stephen]

Regarding what the plans definition is for plan income you should refer to the adoption agreement and plan document.

We refer such compensaiton issues to the CPA and have them calculate the compensation.

There have been many threads that have discussed this topic.

[Lori Friedman]

The Form W-2 income is probably erroneous (unless former employees became LLC members during the year, which would legitimately explain the Form W-2 income), but you don't want to try to make the adjustment yourself. The adjustment will have a ripple effect throughout Schedule K. Bounce this one back to your client and let the LLC's accountant deal with it.

[TBob]

Would W-2 and K-1 income make sense in this scenario?

Partnership X, the plan sponsor, is owned 50/50 by two doctors. The Partnership owns 100% of two corporations for which the doctors work. Under the corporations, the doctors receive a set salary reported on a W-2. From the partnership, they receive additional K-1 income.

There may be a reason why this doesn't work but an accountant once explained this set up as a possible means of receiving both types of income. Anyone care to disagree because I am curious of he was correct.

[JAY21]

If the ownership is as you say it makes sense to me that they get both types of comp (w-2 and k-1) personally, but now the situation begs the questions did all entities adopt (or co-adopt) the plan. Under a pension plan all members of an Affiliated Service Group or Controlled Group are jointly liable for the minmium funding I believe, so I have heard some people feel formal co-adoption in that case may not be necessary (I disagree), but generally I think most practioners feel all entities should co-adopt the plan for clarity in taking deductions for the contributions. Presumably part of the contribution would be a deduction to the corporations likely based on the share of total comp provided by the w-2s, though I don't believe there are specific rules on this split. This would then affect the k-1 income of the partnership due to add'l deductions on the corporate return (if not already anticipated) and part of the contribution would be a keogh deduction (self-employed) taken on each partner's personal tax return. I think the issues has evolved from types of compensation to (a) who are the plan sponsor(s) (b) and how is the tax deductions taken and/or split, © what impact on the k-1 income is there if not already reflected due to corporation deduction for part of the contributions.