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I have a 401k deduction question regarding k-1 imcome and…

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I have a 401k...

I have a 401k deduction question regarding k-1 imcome and basis

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I am a 5% partner and have $10,000 of ord income and $200k of guaranteed payments. I withheld $18k in 401k and the tax software is limiting my 401k deduction to the $10k of basis I have

Submitted: 29 days ago.Category: Tax
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3/25/2018
Tax Professional: Lane, JD, CFP, MBA, CRPS replied 29 days ago
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 14,005
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Hi. …. My name’s 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, to clients on three continents, since 1986.

I’m reading your question now.

Bear with me a moment while I type up my response.

….

Then if you have further questions we can go from there.

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Customer reply replied 29 days ago
ok
Tax Professional: Lane, JD, CFP, MBA, CRPS replied 29 days ago

It's not basis that's the issue here it's the definition of earned income for retirement plan purposes, as it relates to partners.

...

Not infrequently, I see partners or LLC members (of LLCs treated as partnerships) make salary deferral contributions during a plan year based on their guaranteed payments and then find out after the end of the plan year (assuming the plan and the partnership have the same year-end) that the partnership or LLC has a net loss. Accordingly, they don't have earned income for purposes of the retirement plan and cannot make any salary deferral contributions or receive any employer contributions.

...

For purposes of the entity's retirement plan, the earned income of a self-employed individual is his or her net earnings from self-employment as defined under IRC section 1402(a) with several modifications. Under section 1402(a), net earnings from self-employment are the business' gross income less allowable deductions from that income.

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Customer reply replied 29 days ago
I have plenty of earned income, however since the 401k deduction is listed under other deductions, its being limited by basis. Is this correct?
Tax Professional: Lane, JD, CFP, MBA, CRPS replied 29 days ago

Not by basis but by the ordinary income of the partnership ... basis has nothing to do with 401(k) contributions ... although it IS a limit to the tax benefit of operating losses.

...

What's happening here, is, becasue a partnership is technically making the contribution FOR the partner, becasue the guaranteed payments have eaten up so much of the profit, there's only the 10000 of ordinary income that can be used as compensation basis for the contribution.

...

Goes basi too the definition of compensation for self employed individuals (sole proprietors, partners, LLC member not taxed as corporations). The business profit is the compensation.

...

You would have a larger contribution by taking less in guaranteed payments and more in profit allocation.

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Customer reply replied 29 days ago
ok
ty
Tax Professional: Lane, JD, CFP, MBA, CRPS replied 29 days ago

SO sorry to be the messenger, You've very welcome.

...

Hi. …. My name’s 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, to clients on three continents, since 1986.

I’m reading your question now.

Bear with me a moment while I type up my response.

….

Then if you have further questions we can go from there.

Ask Your Own Tax Question
Tax Professional: Lane, JD, CFP, MBA, CRPS replied 29 days ago

SO sorry to be the messenger, You've very welcome.

...

Ask Your Own Tax Question
Tax Professional: Lane, JD, CFP, MBA, CRPS replied 29 days ago

(sorry ... paste my intro in there again) meant to say ......

...

Your positive rating … (by using those the stars on your screen, and then clicking “submit”) …is thanks enough.

Otherwise I receive no compensation for the work here.

...

Thank you!

Lane

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