Converting K1 to "plan wage" for cross test

[jmartin]

Have a small partnership that is cross tested. We were giving two sets of numbers from client and wanted to verify which we should use to calculate the plan wage for testing purposes. One was the k1 report itself (self employment earnings in box 14a). The second number received before the k1 was a "net number".

To go from K1 earnings to the testing wage you do the following:

Step 1 - Take self employment earnings (box 14a)

Step 2 - Subtract out "?"

Step 3 - Back out partner's share of the non key employer profit sharing

Step 4 - Back out 1/2 SE Tax

Step 5 - Back out partner's own profit sharing

Result - Testing wage

When I was reconciling from the self employment earnings to the "net number" they initially provided. I found they did the following: Took earnings in box 14a and then subtracted out Sec 179 (box 12), Other deductions (box 13), non-deductibles (box 18) and then added investment income (box 19).

Wanted to double check on should be backed out in Step 2. For example I know you would back out Section 179. Should I back out the other items mentioned above (including adding back the inv income)? Or just some of the items, like Sec 179?

[John Feldt ERPA CPC QPA]

Each individual partner in a partnership is generally taxed just like a sole proprietor, and their “compensation” for retirement plan purposes is equal to their net earnings from self-employment (NESE). This amount is generally equal to line 14a of the partner’s K-1 after making adjustments by subtracting:

1. the additional first year depreciation for Section 179 deductions (if any),

2. partnership expenses paid by the partner but not reimbursed by the partnership as shown on Schedule E attached to the partner’s Form 1040,

3. any oil and gas depletion (rare), and

4. one-half SE tax (164(f) deduction) related only to this partnership as found on the front of the partner’s Form 1040, meaning if there are other businesses producing NESE for the partner, an additional reasonable adjustment is needed.

5. After applying #1-4 above, this net amount is further reduced by the contributions allocated in the retirement plans for the partner, other than 401(k) salary deferrals.

[jmartin]

I just verified with client that the partners do not have any URBE amounts. Based on that it sounds like in my list, I only subtract the Section 179 and disregard the "other deductions", "non-deductible expense", and "investment income" items. Is that correct?