Self Employment Income determination

We have a client that is an LLC filing as a partnership but the K-1s are completed differently than I have seen before.  There is nothing reported in Box 14 even though the net income for the company for the year was over $1 million. Both partners received guaranteed income for the year of $120,000.  One partner is a limited partner and the other a general partner. We asked the CPA why there was nothing in Box 14 and he indicated that per the IRS rules, if a reasonable guaranteed payment for services is paid to each member, the earnings of the LLC reported in Box 1 of the K-1 would not be subject to SE tax.  They believe that the $120,000 is a reasonable amount and each member did pay SE taxes on that amount. 

Since guaranteed payments are not normally considered in the self-employment compensation calculation and there is nothing in Box 4, it seems that their plan compensation would be zero. They did defer and wanted to put in a profit sharing contribution for themselves but I think the deferrals will have to be returned.  Does this sound correct?  Has anyone had this situation?

It sounds as if the CPA is cherry picking rules from what is allowed for LLC members and also how partners income is used for plan purposes.  There is a difference in treatment between a general partner GP and a limited partner LP.  The GP must use Net Earnings from Self Employment (NESE) which is Box 14 on the K-1.  It is possible a LP would have received only the guaranteed payment assuming that the LP did not have NESE.  Guaranteed payments for services should appear in Box 4a.

I am not a CPA, but have enough experience with LLCs and partnerships to agree with you that something is off.  IRS Publication 560 touches on this https://www.irs.gov/pub/irs-pdf/p560.pdf, but I suggest that the topic is complicated and is best addressed by a competent CPA or legal counsel. 

3 hours ago, Rose said:

Since guaranteed payments are not normally considered in the self-employment compensation calculation

...but I think they are. If they paid SE tax on it then it should be plan compensation. 

Having said that, I was not aware that one could avoid SE tax on partnership profits, at least for a general partner. And as Paul I notes, there is a difference in treatment between a GP and LP.  But I'm not a CPA. I have seen the boxes on the K-1 filled out so many different ways I would not necessarily rely on them. When in doubt, we press the CPA to tell us what they paid self-employment tax on and use that.

Back to my original point, I don't believe there is a difference between someone reporting $120K of guaranteed income and no profits, versus no guaranteed income and $120K of profits (assuming SE tax was paid either way).

20 minutes ago, Bird said:

...but I think they are. If they paid SE tax on it then it should be plan compensation. 

If they are guaranteed payments for services (line 4a) but not guaranteed payments for capital (line 4b).  I think the amount in 4a should also be 14a though, at least that is what every CPA has done if I question why there is an amount in 4a but not 14a.

*Edit.

I'm 99% sure that guaranteed payments for capital is never plan compensation, even if SE tax has been paid.  A general partner generally has to include both for SE tax purposes, while a limited partner only includes guaranteed payment for services.

Let's not ignore the fact that the partnership had over $1,000,000 in net income.  I would expect that at least some if not all of that to show up on the K-1 for the GP as NESE.