annual contribution - but no SECA tax paid?

[Guest forohonek]

I do not see why this will not work. Please reply with any cites or rulings that would disallow this idea!

Step #1

LLC is formed to run a trade or business where the annual gains of the business are not subject to self-employment earnings. i.e. a "hedge fund."

LLC retains a managing member (via a 1099-MISC arrangement) to provide management or consulting services needed to operate the hedge fund.

Result, LLC has gains not subject to self-employment and the LLC has management fee expense that is used in computing self-employment earnings. Therefore the K-1 has negative self-employment earnings. Let's use $300,000 of such expense in this example.

Step #2

Now over to the form 1040. The taxpayer has $300,000 management fee income reported on his Schedule C, subject to SECA tax. The member also has a K-1 following $300,000 of negative self-employment earnings,

Result: based on this Schedule C trade or business of management services, the taxpayer establishes a plan and funds it with $49,000. Then when the taxpayer completes his Schedule SE, the Sch C earnings are offset with the K-1 negative earnings and he nets out with zero self-employment earnings and therefore zero SECA tax.

Conclusion:

Bottom line result: taxpayer has justified a $49,000 deductible plan contribution and yet he incurs zero SECA tax.

Please throw some stones at this, with support for your conclusions!

Possible problem:

Using a 1099-MISC when GPP Guaranteed Payments to Partners might be required, and if done that way then the K-1 would show NET zero self-employment earnings and therefore perhaps that would jinx any deduction for a $49,000 plan contribution? [Thoughts?]

IF SO - then I propose forming a single member LLC and that SMLLC is not a member of the LLC, but is hired to provide management and consulting.

The SMLLC not being a member in the LLC, would legitimately not be paid GPP. but a SMLLC, being a disregarded entity with regards to the form 1040, would still net out the self-employment earnings.

My thinking is that either method would be legitimate, but method two would be bulletproof.

Any, comments will be appreciated...

[K2retire]

With negative self employment earnings, you have exceeded the 415 limit of the LESSER of $49,000 or 100% of compensation.

[Guest forohonek]

With negative self employment earnings, you have exceeded the 415 limit of the LESSER of $49,000 or 100% of compensation.

Thanks for the reply!

But I am referring to a plan for the Schedule C trade or business, which in the example, has $300,000 positive compensation. I do agree that over-all the taxpayer will have net zero self-employment earnings due to the negative self employment earnings passing through from the LLC.

If this is what you were saying...

Then I do not think that your interpretation of the §415©(1) limitation in that sense squares with IRS Regs §1.401-10 Definitions relating to plans covering self-employed individuals.

IRS Regs 1.401-10(b)(2) If a self-employed individual is engaged in more than one trade or business, each such trade or business shall be considered a separate employer for purposes of applying the provisions of sections 401 through 404 to such individual. Thus, if a qualified plan is established for one trade or business but not the others, the individual will be considered an employee only if he received earned income with respect to such trade or business and only the amount of such earned income derived from that trade or business shall be taken into account for purposes of the qualified plan.

If I am mis-reading anything, I'd appreciate comments, with any available supporting citation!