AndyH Posted November 9, 2000 Posted November 9, 2000 Does anybody have a good data request procedure for partnerships which addresses self employment tax procedure and the allocation of contributions for both employees and partners? My understanding is that partnerships can have in their agreements methods for allocating expenses such as retirement plan contributions. This came up as one of the Q&A's at the October ASPA conference. There are also some circumstances in which partnership compensation is not subject to FICA. Anybody have a sound procedure to address what information to request (i.e. capital interest, allocation procedures) and how to reduce partnership income for employee and partner costs?
MR Posted November 10, 2000 Posted November 10, 2000 I'd start with requesting the K-1 for each partner. This will contain the net income from self employment, section 179 expense and the partners' share of the profit sharing cost.
Guest Paul Leslie Posted November 10, 2000 Posted November 10, 2000 I'm going to get techincal here but its critical. A partner is not an employee. Partners are subject to self employmnent tax not FICA-- So a partner will never get a w-2 they will get the K-1. Employees' contributions will be based on their compensation reported on the w-2. This is not different from any other business. What ever the plans says will be the amount of contributions for the employees. The best place to know what income is subject to SE tax for a partner is in the instructions to the 1065. There is worksheet calculating the income subject to SE tax which is then allocated to the partners and reported on the K-1. The partnership aggreement should state how the income deductions and credits will be allocated. The IRS' rule is that it must make economic reality, i.e. you can't allocate all of the income to the partner with the lowest tax bracket and all losses to the partner with the hightest tax bracket. Now retirement plan contribution are going to based on the income passed through to the partner. If the partnership has SEP and the partnership contributes 15% for the employees. The partnership must contribute 13.0435% of each partner's "net income". The amount of contributions made to a plan a determined at the partnership, each partner doesn't have any say in how the allocations will be made. So what ever comes through on the K-1 as contribution for a partner is what the partner can deduct on his or her own personal return. The only way to change the allocation would be to change the partnership aggreement. Remember you can not discriminate with retirment contributions, i.e. state in the partnership agreement one partner gets a contribution to a retirement plan for one partner while another partner who is also qualified doesn't get any contributions. The written retirmement plan will take precedence over the partnership aggreement.
AndyH Posted November 10, 2000 Author Posted November 10, 2000 Thank you both for the responses. Paul, if I understand you correctly, what a TPA should request in anticipation of determining or allocating a retirement plan contribution is: 1. Preliminary K1 "income"-which line? 2. Amount of K1 "income" subject to self employment taxes 3. The formula or methodology in the partnership agreement for allocating retirement plan contributions for both employees. 4. The formula or methodology for expensing contributions for partners partners (i.e. determining net "income" for allocation purposes). Most plans are substantially more complicated than SEP's. Allocations for many plans must be done algebraically, cross tested plans for example, and all partners are not necessarily covered under the terms of the retirement plan, so I'm trying to identify the optimum procedure, since I have no doubt many such allocations are done incorrectly. Again, thanks for the feedback.
David MacLennan Posted July 10, 2001 Posted July 10, 2001 Just happened to come across this thread when doing a search. Looking at the last msg in the thread, you are missing a couple of items from the partnership tax return that must be reflected in the earned income calculation. Andy, if you still need it, I developed a data request form for partnerships. It has 10 or so rows for data and columns for each partner, that requests all the necessary line items from their partnership tax returns. I complete the form with results from the allocation, with the final line being their "Net Net" Earned income. This serves has a check on my work and can be provided with the client report so any partner can see how the comp in the allocation was derived.
AndyH Posted July 10, 2001 Author Posted July 10, 2001 David, that would be most appreciated. My email is ahartnett@angellcompanies.com, or if you don't have it in a form that can be emailed, my fax is (401) 435-5134. I still find this an uncomfortable area, so any such help would be terrific! Thanks!
Richard Anderson Posted July 10, 2001 Posted July 10, 2001 David, Very generous of you to share with others. If you don't mind sharing twice, my email is randerso@nhspa.com or fax is 302-479-8810. Thanks.
David MacLennan Posted July 10, 2001 Posted July 10, 2001 Emailed it in PDF. Let me know if you don't receive it.
Guest lforesz Posted October 4, 2002 Posted October 4, 2002 Hi, I'm personally struggling with the earned income thing myself right now and came across this thread. I guess it doesn't hurt to ask if one of you can also send that spreadsheet to lori.foresz@CNB.com. It is most appreciated as I try to grasp the partnership aspects. There is just not a lot of good info out there. Thanks!
AndyH Posted October 4, 2002 Author Posted October 4, 2002 My computer crashed this summer and I lost the file. I'd like to get a copy as well if anybody has it at: ahartnett@angellcompanies.com
Mike Preston Posted October 4, 2002 Posted October 4, 2002 If the originator wouldn't mind, perhaps it could be posted here on BenefitsLink?
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