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Wallstreet Esq.
Wallstreet Esq., Tax Attorney
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Experience:  10 years experience
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I have a doctor client who has .33% interest in a medical

Customer Question

I have a doctor client who has .33% interest in a medical office. He and his wife are also owners of a management consulting LLC. The medical office pays the management consulting co 200K a year. The medical office has a 401K plan where the doctor client is considered a highly compensated employee and all of the other employees of the medical office are annually tested for the 401K plan.
On form 1065 for the management co, I did not deduct on line18 for retirement plan expense. So the self employment income passed through to the doctor client's 1040. I had the software calculate a maximum SEP for the doctor client which it put on the front page of the 1040 that it did based on the self employment income passthrough from the K-1 of the management company. Two Questions.
1) Is the SEP deduction allowed on the doctors client 1040 or would this violate the Affiliated Service Group Law even though I did not actually deduct the retirement expense on form 1065 for the management company? 2) If I cant do the doctors's SEP, would I be able to deduct the wife's SEP on the from page of the 1040 or would she fall under any sort of attribution rule if this is seen as an affiliated service company?
Submitted: 9 months ago.
Category: Tax
Expert:  Mark Taylor replied 9 months ago.

Hi, my name is Mark. I will be happy to help you with your questions. Does the doctor own 1/3 of the medical office. Please give me a few moments to prepare a response.

Customer: replied 9 months ago.
the doctor owns 1/3 of the medical office.
Expert:  Mark Taylor replied 9 months ago.

Based on the rules the consulting company would be an affiliated service group. An affiliated service group is one type of type of group of related employees and refers to two of more organizations that have a service relationship and in some cases an ownership relationship described in IRS 414(m). An affiliated service group would fall into one of three categories: organizations that are designated as a first service organization (medical office), B organizations consist of a first service organization and at least one b organization, and third would be a management group.

Expert:  Mark Taylor replied 9 months ago.

Let me give you the requirements of a B-organization. Sorry but the rules are very technical.

Customer: replied 9 months ago.
Does the fact that I did not deduct the retirement expense on form 1065 matter?
Expert:  Mark Taylor replied 9 months ago.

For a B-Organization a significant portion of its business must be from performing services for an A-organization.

The services must be of a type historically performed in the service field of an A-organization.

10% or more of the interest must be held by highly compensated employees.

Expert:  Mark Taylor replied 9 months ago.

The only way that this would not qualify for an affiliated service group is the consulting company were not providing services typically performed by the medical office. You would need to show that the consulting was separate from the medical services.

Expert:  Mark Taylor replied 9 months ago.

No, not deducting the retirement expense on form 1065 does not matter. If this is an affiliated service group then the members of the LLC would be treated similar to the employees of the medical office. You would not be able to discriminate.

Expert:  Mark Taylor replied 9 months ago.

https://www.irs.gov/pub/irs-tege/epchd704.pdf​. Here is a link to the IRS regarding training material for affiliated service groups. The affiliated service group starts on page 40 and is just over 60 pages.