LLC Compensation and ADP ACP Tests

[Guest Ted Kowalchuk, CFP, CFS,]

We're testing an LLC client (taxed as a partnership) for 2006 and the ADP and ACP tets fail using the "reduced" compensation for the 2006 year. However, when we use the "unreduced" compensations, the tests pass. Which compensation should we use for the ADP ACP tests? Thanx.

[rcline46]

First please explain 'reduced' and 'unreduced' so we don't end up discussing apples and peaches.

[Guest Ted Kowalchuk, CFP, CFS,]

By reduced I mean compensation that is reduced by 50% of the self employment tax and by the amount of the employer contribution attributale to that owner's percentage of ownership of the business.

[Mike Preston]

Reduced. To me, "reduced" is what you have described as reduced, reduced by deferrals. Something tells me that goes the wrong way for you.

[Guest mjb]

Why would you reduce the comp by the amount of the contribution and 1/2 fica tax which are reductions affecting the partner in computing his max deduction on the 1040, not the amount of comp paid to the partner. Under the 1065 form the salary paid to a partner includes the amount of the pension contribution and the partner claims the deduction for the pension contribution on line 32 of the 1040 form.

[Blinky the 3-eyed Fish]

Mjb, I didn't understand your post.

Ted, the answer to your question lies in how you compute earned income for plan purposes. I fear if you are asking the question, you aren't considering factors such a 179 expenses, amongst other items.

[Mike Preston]

mjb, how about because the regs say one must?