DB deduction, stream of conscience....

[Bri]

Got a client, sole prop filing a K-1 as a 100% partner.  (Had a partner through 2019, that guy's gone/paid etc.)  Sponsors CB and 401k.

K-1 shows about 74,000.  Cash balance credit is a flat 150,000, but he's done enough cushioning in prior years that his MRC is only around 46,000.  Max is hundreds of thousands higher, and he's not near his 415 limit (this is first year I've seen in five where he's been below 401a17 in Earned Income).

Sponsor says he'd like to deduct 100,000.

Obviously that exceeds his Earned Income so I'd think this is a nondeductible contribution.  But he could make a 4972(c)(7) election to not owe any sort of excise tax.

I guess the thing I need clarification on is, what stops him from looking at his overall income for the year (taxable investments, perhaps) and use that as something to deduct the remaining 26k of the 100k against....

I suppose it might have to do with the fact that the other income is passive and therefore any claim for a deduction against THAT income isn't an ordinary 162 expense of the business.

Am I close, crazy, or somewhere in between?

Thanks!

-bri

[Mike Preston]

I'd say you are spot on.

[Bob the Swimmer]

Right on both pros’ answers- the requirement is Net Earnings from Self-Employment ( sch. C income) which I’ve called NESE when I teach this subject.

[DBnme]

In a perfect world this is where your client's CPA would make an appearance.

[Bri]

In a perfect world the CPA wouldn't suggest just deducting it against his spouse's income, though, either! 🤐