Partner's negative basis & pension deduction

Can a partner take a deduction for pension contributions to his 401k plan if he has net earned income for the year, however, is carrying a negative partnership basis on the books?

That's a question for his accountant

You are right. I'm trying to confirm the accountant's position that the partner can not take a pension deduction. It's not stated in Sec 404.

Interesting. I'd have said the opposite from the CPA. Has the CPA given an explanation for the position taken? 

I would think "no problem" but I'm not an accountant.  But...accountants are wrong on pension issues an awful lot.

I believe that the partner could take a deduction on the pension cost to his staff, but he is unable to get an allocation and a corresponding deduction.

41 minutes ago, BG5150 said:

I believe that the partner could take a deduction on the pension cost to his staff, but he is unable to get an allocation and a corresponding deduction.

I think it depends on when he went negative. If he has earned income for the current year he should be able to get the contribution. The plan document almost certainly requires it, although the partnership agreement may treat it as an allocation of compensation and require that he make up his capital account deficit before any further compensation is allocated to him, so they may be in conflict.

An accountant just explained it to me - as Luke says, if he has earned income for the year, he can get a contribution and take a deduction.  But if he uses his prior losses to offset profits in the current year, then he would not have earned income.  So it depends on how the prior losses are used, if at all.  It actually makes perfect sense.

The original question said "... if he has net earned income for the year" and the answer is clearly yes...if that clause is correct.  But if he had profits that were offset by prior losses then he would not have earned income for the year.  It seems that either 1) the question wasn't asked properly, or 2) the accountant is wrong.

As is almost always the case, ask "what income is s/he paying self-employment tax on?" and use that number as a starting point.

Now THAT makes sense. Thanks for obtaining that clarification.

Thank you all for your replies. I have a clearer understanding of our client's options.