Self Employed, 2 businesses, 415 limit

Sally owns 2 separate business, 100% ownership.  Business PDQ is the 401k profit sharing plan sponsor.  PDQ has been in business for 3 years.  2025 SE income is $350,000 from PDQ.  There is 1 employee in PDQ and she is covered in the PDQ plan.  Sally started Business XYZ in 2025.  There are no employees.  This business will have a $325,000 loss for 2025.  XYZ did not adopt PDQs plan.  I use ftwilliam documents and confirmed that there is not an automatic adoption feature.  

Her SE income from PDQ is used for plan purposes because PDQ is the plan sponsor.  Although XYZ did not adopt the plan, is her SE income from PDQ and XYZ combined for 415 purposes?  Is she limited to compensation of $25,000 for 415 purposes even though her PDQ adopted the plan but XYZ did not?

I'm getting some conflicting information.  One suggestion is that PDQ and XYZ are combined for 415 however, there's Zero income from XYZ (not negative income) and therefore, the 415 limit and plan compensation are $350,000.

I appreciate your help.  Thanks!

There is no clear answer to this in the law or regulations or other official guidance.

Absent that, it seems to me that the most correct thing to do is

1. Net out self-employment earnings and losses from all entities

2. Apply reduction for 1/2 self-employment tax to the net anount

3. If the result is less than 0, treat it as zero

4. Add any W-2 income

In your case I think their 415 comp is $25,000.

Think about it this way: if this wasn’t the case, then everyone should start a second sole prop to absorb all their losses, and only recognize gains in the one that adopts the plan. That’s clearly not the intended result so I wouldn’t go that route.

Does this help?

“In the case of an employee of two or more corporations which are members of a controlled group of corporations (as defined in section 414(b) as modified by section 415(h)), the term compensation for such employee includes compensation from all employers that are members of the group, regardless of whether the employee’s particular employer has a qualified plan. This special rule is also applicable to an employee of two or more trades or businesses (whether or not incorporated) that are under common control (as defined in section 414(c) as modified by section 415(h)), to an employee of two or more members of an affiliated service group as defined in section 414(m), and to an employee of two or more members of any group of employers who must be aggregated and treated as one employer pursuant to section 414(o).”

26 C.F.R. § 1.415(c)-2(g)(2) https://www.ecfr.gov/current/title-26/part-1/section-1.415(c)-2#p-1.415(c)-2(g)(2).

There are special rules for self-employed owners of multiple businesses.  Take a look at §1.401-10 - Definitions relating to plans covering self-employed individuals. subsection (c).  The rules are intended to avoid an abuse where one company generates all of the income and gets a big deduction, while another company has the losses.

It gets complicated because the whether or not the income from the company that has not adopted the plan depends on factors such as the level of compensation the owner received from each business for personal services performed for each business, and the level of compensation where capital is a material income-producing factor.

If capital is not a material income-producing factor, then likely the income (loss in this case) from the company that did not adopt the plan could be disregarded.

Unless the facts are clear, then you should ask whoever is preparing the tax returns for the businesses and declaring the deductions for each business and for the owner's personal taxes understands these rules and can support the decision to include or exclude the losses in the determination of plan compensation.

Here’s the rule Paul I mentions: 26 C.F.R. § 1.401-10 https://www.ecfr.gov/current/title-26/section-1.401-10.

Consider how the 1040 tax return is prepared. The total of all Schedule C income (positive and negative) determines the income subject to Self Employment Tax.  That income then goes on the 1040.  After the adjustment for SE tax, the balance is available for "comp and contribution) to the 401k plan.  In the example you provided $25,000 is the starting point to determine the maximum deductible contribution.