Pension Deductions with LLC

[Gary]

We have a client that has an LLC.

For purposes of this post we will assume that there are two partners and 2 additional employees.

The client has a DBPP and 2007 calendar year is their first plan year.

Say the LLC does the following

1. Makes a guaranteed payment of 100k to each partner

2. Makes a deductible pension payment of behalf of employees of 20k

3. The net loss of the partnership, after guaranteed payments and pension contribution for employees is 300k in total and 150k for each partner.

First of all my understanding is that the pension contribution on behalf of the partners, if deductible, is deducted on the personal tax return of the partners and not on the LLC return. Are we in agreement with that?

A few questions regarding the partners and their personal tax returns:

1. Do we agree that the partners pay SE tax on the 100k of guaranteed payments?

2. Do we agree that the partner will show 100k of income on their 1040 from guaranteed payments, which are offset by a loss of 150k for a net income loss from the partnership of 50k?

3. Do we compute the minimum funding based on the GP of 100k?

4. If the minimum contribution for the partner is say 50k, is it non deductible for 2007 (and carried over until a later year) since the net earned income is a loss of 50k?

Are there any other interpretations or reference sections?

Thanks

[Blinky the 3-eyed Fish]

1. I don't agree

3. No.

4. You will get different answers on whether or not a required contribution that is not deductible due to lack of sufficient earned income is indeed deductible in future years. I believe it should be.

[Gary]

Thanks Blinky,

Regarding item 1. would it be correct in determining earned income as negative 50k (100k GP -150k (loss)) in which there is no SE tax?

That's how I originally saw it. The tax people in my firm thought it s/b subject to SE tax based on the GP. In my opinion the GP doesn't have an impact, except to confuse everyone at my firm.

And then I would see it as -50k as the income for pension purposes, thus for practical purposes the pension compensation is $0, which would create no minimum funding for the first plan year of 2007, since the benefit is based on compensation. Do we agree on that?

Thanks.

[mwyatt]

What about prior year compensation/Net Earned Income? If your document is set up to exclude compensation prior to the effective date, then your analysis is correct (BTW, why did this plan get set up with losses in the first year?). However, if it includes all compensation, then pre-effective date history is also used in determining average compensation.