Lucky32 Posted October 10, 2023 Posted October 10, 2023 A plan is sponsored by a 1-man LLC who's being taxed as a partnership, though the owner receives both SE income and W-2 wages (I've seen a thread on these boards regarding both types of comp being paid from such an LLC, and the consensus seems to have been that, though rare, it is possible.) Plan Comp is defined as 415 safe harbor comp. The TPA is asserting that Schedule E income (for the K-1 income he receives) should be included when performing the val, however, we weren't able to find anything in the regs specifically allowing its inclusion - does anyone know if this type of income can be included under the 415 safe harbor definition? If possible, a cite would be most appreciated. BTW, the K-1s did not show any Schedule E amounts in boxes 14, 4a, or 4b (they were all zero), and no Schedule C was required to be filed. Thanks in advance for any assistance offered.
Bird Posted October 10, 2023 Posted October 10, 2023 Schedule E income is supplemental income, and I'm pretty sure that it is not earned income. Dr. Google confirms that but there is no cite. If it is not earned income it is not plan income. I generally fall back on "is it subject to self-employment tax" to confirm whether it is earned income or not. Luke Bailey 1 Ed Snyder
Popular Post Paul I Posted October 10, 2023 Popular Post Posted October 10, 2023 Attached is Publication 560 (2022), Retirement Plans for Small Business which gets into the details of calculating income for self-employed individuals. There is a worksheet titled Deduction Worksheet for Self-Employed with Step 1 is: Enter your net profit from Schedule C (Form 1040), line 31; Schedule F (Form 1040), line 34;* or Schedule K-1 (Form 1065),* box 14, code A.** For information on other income included in net profit from self-employment, see the Instructions for Schedule SE (Form 1040) Note that Schedule E is not listed along with the other schedules, and many of income items on Schedule have to do with passive income. It is worth looking at the Schedule SE instructions where there are long lists of what is and is not included in earnings from self-employment. If you distill all of this down, any income on Schedule E that is considered as income from self-employment for personal services would be reported on the individual's K-1. Any income reported solely on Schedule E is insufficient to determine if that income should be considered by a retirement plan. If the Schedule E income does not flow through to Schedule K-1 or to Schedule SE, then it is not income from self-employment and should not be used for retirement plan purposes. If the client believes it should be included, or the TPA believes it should be included, then the burden of proof is on them. p560.pdf Bird, CuseFan, Bill Presson and 2 others 5
Dare Johnson Posted October 11, 2023 Posted October 11, 2023 It takes 2 or more taxpayers to have a partnership so he cannot have a 1 man LLC taxed as a partnership. If there is no SE income listed in box 14 the income is not SE earnings and cannot be used for plan comp. Bill Presson and Luke Bailey 2
Luke Bailey Posted October 11, 2023 Posted October 11, 2023 1 hour ago, Dare Johnson said: It takes 2 or more taxpayers to have a partnership so he cannot have a 1 man LLC taxed as a partnership. Right. A single member LLC is a disregarded entity unless it has elected to be taxed as a corporation. Bill Presson 1 Luke Bailey Senior Counsel Clark Hill PLC 214-651-4572 (O) | LBailey@clarkhill.com 2600 Dallas Parkway Suite 600 Frisco, TX 75034
Lucky32 Posted October 14, 2023 Author Posted October 14, 2023 On 10/11/2023 at 2:41 PM, Dare Johnson said: It takes 2 or more taxpayers to have a partnership so he cannot have a 1 man LLC taxed as a partnership. That is what I thought, too, and when I asked the CPA about this I was told it's legit because the other 'partner' is another LLC that's fully owned by the plan sponsor (which fortunately has no other employees). Although I've seen this type of arrangement several times before, I have to wonder about its legality.
Bob the Swimmer Posted October 15, 2023 Posted October 15, 2023 Schedule E income is never earned income for retirement plan contributions. It’s rental or royalty income and does not qualify. No extenuating circumstances. Luke Bailey 1
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