Brain Cramp - EOY Val and Sole Proprietor

[mwyatt]

Not sure if I'm overthinking this, but:

EOY valuation for a sole proprietor. Schedule C Income for year is such that Net Earned Income (Sch C - SET - Contribution) will be under the maximum salary.

Believe there is a solution to solve for IRC 430 so that there is a specific Net Earned Income that will generate a 430 contribution such that these equal Sch C - SET.

For maximum contribution, which would be a higher number, believe that I need to solve for a separate Net Earned Income such that this 404 Net Earned Income plux max equals Sch C - SET as well (don't think it makes sense to just plug in the 430 NEI and solve for maximum as would overstate situation).

So now have a range for the client of minimum to maximum. However, client will contribute what they contribute (probably the maximum). Question is now for showing what do I show on the Schedule SB? I now have an actual Net Earned Income figure for 2011 equal to Sch C - SET - actual contribution made to the plan. Should I recompute the Funding Target and Target Normal Cost based on this actual NEI and show on Schedule SB, or should I show my hypothetical numbers that I solved for the minimum contribution solution?

Let me put some quick and dirty numbers in play to illustrate (not to dimension, but just to show what I'm getting wrapped up on):

Let's say Sch C - SET (my target) is $100,000.

I set up a spreadsheet to determine the IRC 430 minimum contribution, and I end up with a hypothetical Net Earned Income of $60,000 and a minimum contribution of $40,000.

I then continue and solve for IRC 404; now I have a hypothetical Net Earned Income of $10,000 and a maximum deductible contribution of $90,000. I don't think that I would use a NEI of $60,000 and calculate the 404 off of that as think overstates maximum deductible.

Let's say client decides to contribute $70,000 for 2011, so my actual Net Earned Income for 2011 is $30,000. Think I should recompute the Target Normal Cost on this actual NEI (FT shouldn't change since EOY val); should this final TNC etc. based on the $30,000 NEI be what's used for disclosure on the SB and AFTAP?

[SoCalActuary]

Ultimately you will know the exact earned income, after the contribution is deducted.

Then you prepare your valuation, check for minimum funding and maximum allowable deduction.

Until the payment is made, you are just guessing.

[mwyatt]

OK, so I do my two iterations for minimum required (which gets highest NEI / lowest cbn that fits my total) and my maximum deductible (which gets lowest NEI / highest cbn that fits my total).

Think these present the range for my client initially. He then picks a contribution number which gives me an exact NEI for 2011.

For 430 purposes, I rerun with this actual NEI to get final FT, TNC, AFTAP, etc. which goes on the Schedule SB.

[Hojo]

OK, so I do my two iterations for minimum required (which gets highest NEI / lowest cbn that fits my total) and my maximum deductible (which gets lowest NEI / highest cbn that fits my total).

Think these present the range for my client initially. He then picks a contribution number which gives me an exact NEI for 2011.

For 430 purposes, I rerun with this actual NEI to get final FT, TNC, AFTAP, etc. which goes on the Schedule SB.

Exactly. Your final numbers depend on the actual contributions to get NEI. It's kinda backwards form how you deal with most plans.

[Calavera]

I suggest you ask client how much he wants to contribute. It gives you exact NEI. Then you do your valuation to be sure that the contribution given you by your client is between min and max.

And if clients wants the absolute max, then you do your iteration until you get the max under 404 supported by NEI with NEI calculated under the assumption that max will be made.

Also based on the history of NEI the maximum contribution may not benefit your client in the long run (that requires additional consulting and education).