Income determination - multiple schedule c's

Hi

Joe owns 3 LLC taxed as sole-props. Joe is over age 50. Joe never had any employees.

Let's call them LLX, LLY and LLZ

Joe has a DB (no minimum required contribution for 2022) and 401k/PS plan. Only LLX and LLY are the sponsoring/adopting employs. LLZ never adopted either plan.

2022 net schedule c income figures are given as follows (assume after adjusting for 1/2 se tax):

LLX:  -$20,000

LLY: $22,000

LLZ: $100,000

Because only LLX and LLY are part of the plans, only their income can be used and therefore total income that is available for 2022 is $2,000, am I correct?

Because there is 401k deferral election in place for maximum deferral, $2,000 would be deposited into the 401/PS plan as part of 2022 deferrals.

So, the $100,000 in LLX is all taxable. Ouch.

How about the following?

Start a 3rd plan i.e. a new profit sharing plan and put in $20,000 (I know, 3 plans to deal with) and merge the new plan into the old 401k/PS plan in 2023? This would be option 1 which is my favorite. However....

Let's push it further (based on a previous conversation we all had), start a new 401k/PS plan effective 12/29/2022 with PYE 12/31/2022 and full year limitation year (LLZ has been around since 2020). Now we can put away $20,000 of PS and $25,000 ($2,000 was deferred in the old plan) of 401k for 2022.

What are the flaws you can detect here?

Thanks

Correction in the middle

So, the $100,000 in LLZ is all taxable. Ouch.

16 hours ago, Jakyasar said:

"Start a 3rd plan i.e. a new profit sharing plan and put in $20,000 (I know, 3 plans to deal with) and merge the new plan into the old 401k/PS plan in 2023? This would be option 1 which is my favorite. However...."

That works.   I would merge existing plan into a newly created PS to avoid "permanency" issue

10 minutes ago, truphao said:

That works.   I would merge existing plan into a newly created PS to avoid "permanency" issue

No permanency issue with merging new plan into existing plan. The new plan "continues" in the existing plan because of the merger.

Thank you for your comments.

How about the second option with the 401k/PS?

On 2/3/2023 at 5:49 PM, Jakyasar said:

Because only LLX and LLY are part of the plans, only their income can be used and therefore total income that is available for 2022 is $2,000, am I correct?

I do not agree with this premise.  A sole prop doesn't receive a salary or payroll for employee compensation tracking purposes.  The net SE income is intended as an analogue for employee compensation.  An employee would never have compensation of less than $0.  If the employer incorporated both businesses, the employers could not issue a negative W-2 - the loss in one business would not offset the income in the other.  The incorporated/unincorporated status of the business should not change that outcome in this context.  I think you have $22,000 of plan compensation. 

The IRS (unofficially) supported this point of view at an ASAPA Annual Conference Q&A in the mid 2000s.  (I sure miss those IRS Q&As!)  I know that Derrin Watson speaks directly on this point in his tome, Who's The Employer, and takes the position that there cannot be negative earned income.

Hi

Here a link of a prior discussion - hopefully attached correctly.

There are others out there too.

FWIW

Unfortunately, I do not have access to Who Is the Employer?

2 hours ago, David Schultz said:

(I sure miss those IRS Q&As!)

Me too!  

@Jakyasar I agree with David (and Derrin) on the compensation issue.  I would use $22,000.

Its worth pointing out that there is no formal guidance on losses in a related business, so the question should be "is this approach reasonable?"

David

Assuming the same David, I found the ERISApedia webinar from 1/9/2020, slides 48 and 49.

As stated no clear guidance.

I also agree with the question of "is this approach reasonable".

Who makes the determination on a reasonable approach, CPA or TPA or sponsor or counsel?