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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 12679
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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An ordained minister works as a full time w2 employee for

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An ordained minister works as a full time w2 employee for his Church. The priest is covered under a defined benefit retirement plan. The priest, while still active, creates a partnership LLC with another priest. They provide part time consulting services to other Church’s within the diocese (same employer). The Church allows the partner to contribute a monthly fixed amount of his LLC income to the Church’s defined benefit retirement plan which will result in a slightly higher pension benefit for the minister upon retirement. That fixed contribution amount is based on the LLC making $XX in gross income. Assuming the LLC produces $XX, is this fixed monthly contribution to the Church’s pension plan deductible on the partner’s K-1?

Hi. My name's Lane

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NO, for contributions to a qualified plan for a partner is made BY the partnership, (and should be based on net self employment income) but is deducted on the 1040 of the partner.

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Since a partner doesn't actually receive a salary from the partnership, retirement plan contributions on behalf of each partner, again, are based on his or her net self-employment (SE) income from the partnership. This is the amount used to calculate the partner's SE tax bill, reduced by his or her deduction for 50 percent of SE tax attributable to income from the partnership. The partner's deduction for 50 percent of SE tax, as you likely know, is reported on page 1 of his or her Form 1040.

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So, although there is an informational entry on the K-1, Deductible retirement plan contributions made on behalf of a partner (including any elective deferral contributions made by the partner) are not deducted on the partnership's Form 1065 tax return. The deductible contribution amounts are then written off on page 1 of the partner's individual Form 1040 tax return.

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This amount is reported on Form K-1, line 14 (code A)

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Thanks,

Lane

I hold a law degree (J.D.), with concentration in Tax Law, Estate law & Corporate law, an MBA in finance, a BBA, and CFP & CRPS (Chartered Retirement Plans Specialist) designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice on three continents since 1986.

Customer: replied 2 months ago.
Thank you, ***** ***** the deduction would be shown on the K-1 for informational purposes but deducted on the 1040 (line 28?) Makes sense, but if that is the case, I believe it has to be contributed to a SEP, Keogh, 401K, etc. Not sure if the Church pension plan is a qualified plan even though they have agreed to take his contribution.

That's right. Line 28. And the k-1 entry is informational (letting the taxpayer know what amount to use on the 1040.

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Actually, a separate SEP or other plan is not allowed for partners.

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http://hr.cch.com/news/pension/070111a.asp

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This is likely why the church plan agreed

Actually, as I think about this, the prohibition from separate SEP'S is in the situation where there is already a plan FOR the partnership.

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Here, the SEP or other plan would BE the LLC's plan (and only plan)

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You are correct

Customer: replied 2 months ago.
OK - so it looks like this would not be a deduction. That explains why my tax software is not allowing this on the 1040 unless I override which I would never do. I will disallow the deduction and once again I appreciate you "clearing my head". Thanks.

You're very welcome ... Your positive rating … (by using those the stars or faces on your screen, and then clicking “submit”) …is thanks enough!

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Thank you,

Lane

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