Controlled Group - which company gets the deduction

[Pammie57]

So a partnership and an LLC are testing for coverage.  The partnership has a huge profit.  As long as the crosstested formula passes coverage, can the owners choose to deduct their own contributions form the partnership or the LLC?  The partnership has no other employees; all employees are part of the LLC.  I can't find anything on this....Need some input.

[justanotheradmin]

Are you the CPA?

I usually leave deduction issues to the CPA or tax accountant. How the sponsor chooses to take the deduction (or not take the deduction) isn't something I get too concerned about. When I calculate a contribution I include a standard reminder about the timing of deposit, deductibility, and checking with their CPA. 

Beyond that, if you really want to help them figure it out, I would probably tell the client to look to the language of their partnership agreement and LLC documents. Usually a partnership agreement will have some sort of language about how to allocate expenses between the partners, though I'm not sure it would be saying anything about expenses NOT incurred by the partnership. But it doesn't hurt to check. 

 

[Flyboyjohn]

To be deductible, retirement plan contributions must be "ordinary and necessary" business expenses under IRC 162.

So IMHO the contributions for the self-employed owners must be deducted on the tax return for the entity that produced their self-employment income (or split proportionally if they received SE income from both entities).

[Luke Bailey]

Pammies57, we need more information. Are they in a controlled group? Brother-sister, parent-sub? Are you sure both entities have 415(c) income payments, and have both adopted plan? Usually where multiple employers (whether in a controlled group or not) adopt the same plan the plan document will provide that each employer funds the contributions attributable to the credited service and compensation of its employees. Most likely any other provision would, as Flyboyjohn points out, not meet the IRC 162 "ordinary and necessary" test. However, if each company had enough comp paid to the individuals, one could declare a higher contribution rate, or the other might declare no contribution rate at all, for a discretionary profit sharing contribution.