Minority Law partner and Self Employed consultant

[RayJJohnsonJr]

Hi, The attorney is a partner in a large national law firm owning a partnership percentage of about .25%(1/4th of 1%). He also does outside consulting work in the education field earing about $125,000 in schedule C net profit. At the law firm, he deferred $22000 into the law firms 401(k) plan. It is my contention the he can also contibute up to $49,000 into a Profit sharing Plan established by his consulting practice. Am I wrong?

Thanks, my time is running out 4/15.

[austin3515]

Yes and no.

Yes, he can contribute to his own plan established for his schedule C. No, he cant do 49,000 since that is more than the maximum deductible of 25%. Becaise of the Self Employment gyrations, it would be close enough for this purpose (not for tax purposes) to say he can contribute 20% of his Schedule C. Because he's already done his 22K in 401k in the law firm, no sense in doing anything but a SEP.

A SEP of course, is your only option since it's after 12/31.

[RayJJohnsonJr]

Yes and no.

Yes, he can contribute to his own plan established for his schedule C. No, he cant do 49,000 since that is more than the maximum deductible of 25%. Becaise of the Self Employment gyrations, it would be close enough for this purpose (not for tax purposes) to say he can contribute 20% of his Schedule C. Because he's already done his 22K in 401k in the law firm, no sense in doing anything but a SEP.

A SEP of course, is your only option since it's after 12/31.

Thank you, Mr Powers. If the attorney had incorporated rather than being self-employed, could his company have made a $49,000 Profit Sharing contribution, assuming a W-2 greter than $49,000? Also, could the attorney have put in a Defined Benefit Plan for 2009 and obtained a larger contribution(assuming DB limits are followed)?

Thank you again,

Rene

[austin3515]

Nope, the same max deductibel limit of 25% applies. Again, no more 401k available.

[Effen]

the same max deductibel limit of 25% applies

Not True.

The rules are fairly complex, but if there is only a db plan, than there is no 25% restriction.

The 25% (really 31%) restriction in 404(a)(7) comes into effect if there is a combined db/dc deduction during the same tax year and the dc deduction exceeds 6% of compensation.

[austin3515]

I've gotta stop reading these things so quickly. Terribly sorry

[Bill Presson]

I've gotta stop reading these things so quickly. Terribly sorry

Your answer was more right than wrong, especially as it applies to what actually happened and can happen for 2009. It was also right for the incorporation question.

So, I think "sorry" might have been enough, but "terribly sorry" was too much.

[RayJJohnsonJr]

Thank you both for your input and helping me clear this up.

What I still have trouble understanding is, if the DC contribution limit is $49,000 up to 100% of pay, when does thw 100% apply? Does it apply to a 1 employee corporation if the sole employee participant has a $50,000 W-2? When does the 25% of covered payroll apply and when does the 100% of pay apply?

Thanks again.

[Jim Chad]

I feel like getting on my soap box here. So please bear with me. The tax code doesn't ever say anyone can put 100% of pay in a plan.

It says no one can exceed 100% of pay. That is section 415 of the code and is often called the annual additions limitation.

Section 404 say what is deductible. The short version is that deductibility limit for Defined Contribution plans, the employer contributions cannot exceed 25% of the compensation of the Participants. Deferrals are deductible separately.

This same silliness applies to due dates also. There are several of them in different parts of the code.

You gotta love tax simplification!