Partnership Contribution Deductions

[Guest SHP]

Partnership sponsors Safe Harbor 401(k)P/S Plan. Partners originally had 52/48% Partnership Equity split and allocated earnings/expenses accordingly (including Plan contributions).

One of the partners has now sold/transferred their equity interest to the other and will now receive only a guaranteed Partnership draw based the client hours he bills. He is still a Partner, and will not receive a w-2 but continue with K-1, but will receive no share of Partnership equity or expenses.

The partnership still has to contribute for the non-equity partner but it appears that the 100% equity partner will now bear the entire Qualified Plan contribution expense (even for the non-equity partner).

Where does the equity partner take a deduction for the non-equity partners share of the contributions? Can the Partnership agreement state that the non-equity partner still is allocated that expense (has to contribute his own QRP allocation but the equity partner pays all other "employees" contributions) even though he has 0% equity interest in partnership? If that is possible, does the non-equity partner then take the deduction on his 1040?

Any help would be appreciated.

[rcline46]

Got bad news - the sellor just ain't a partner anymore, just an employee on commission from revenues generated. You now have a sole prop no matter what the 'partners' say. Check with their CPA. So the person now called a 'partner' is no more than an employee, and they cannot have a K-1!

Ok - if it is now a limited partnership maybe they can but I bet it is not set up legally that way!

[Guest SHP]

rcline46

CPA confirms that partner will continue to get K-1, just no longer an "equity partner".

Thinking further about this scenario, I guess it is not uncommon for the Profit/Loss Sharing percentages to be different from ownership of capital, although usually not 0% ownership.

Non-equity partner will continue to be able to enter into contracts and will retain unlimited liability with respect to the Partnership.

Any additional thoughts??

[Bill Berke]

I don't agree with rcline (who is usually correct). IRC Section 401©(?) defines an owner-employee as someone who has more than 10% of either the capital interest or the profit interest. Thus, you still have a partnership for all pension purposes (and k-1 purposes). So you can proceed accordingly with cost sharing allocation etc. as you normally would in a partnership situation. I hope this helps.

[BeckyMiller]

Look at IRS Reg. 1.404(e)-1A(f) - for a defined contribution plan, one partner's contribution to the plan may not be deducted by the other partner. This may not even occur under the special allocation rules. So your equity partner needs to determine some way of recovering the cost of the non-equity partner's contribution.

(For this answer, I am assuming that the classification as partner stands for both entities. In my experience such relationship is possible.)

[Guest SHP]

Would it be permissable for the non-equity partner to write a check to the Partnership increasing his capital account from $0 to $x (the amount of his contribution). The Partnership would then contribute that amount to the Plan on his behalf, again returning his equity in the Partnership to $0.