If you treat the 401k cont as distributions then how would the 401k deduction be reported on Sch K?
Doug M wrote:If you treat the 401k cont as distributions then how would the 401k deduction be reported on Sch K?
Code 13R
CO CPA wrote:I am reporting partner's 401k contributions as such:
$25,000 partner contribution to 401k - distribution rather than GP
$37,000 employer match + profit sharing - distribution rather than GP
Employer contributions to a qualified retirement plan—A partner is
allowed to participate in a qualified retirement plan of the partnership
and allowed to receive “employer” contributions. With regard to
defined contribution plans and most defined benefit plans, any
benefits or accruals on the partner’s behalf are treated as taxable
guaranteed payment income subject to SECA. The partner may
generally take a tax deduction for these contributions to the retirement
plan on the partner’s Form 1040.
B, an individual, owns a 5 percent interest in the profits and losses
of PRS an entity classified as a partnership for federal tax
purposes. PRS operates a law practice with respect to which B, a
licensed attorney, devotes his time and energy. In exchange for
his services, B is paid a “salary” of $400,000.
The “salary” paid to B likely should be characterized as a
guaranteed payment under section 707(c). As such, that payment
should be subject to self-employment tax under section 1402.
B participates in the partnership’s health plan and section 401(k)
plan. The $20,000 health premium paid by the partnership for the
partner is guaranteed payment income subject to SECA. Further,
B contributes $18,000 as an elective contribution to the
section 401(k) plan and receives a 100 percent match (capped at
6 percent of section 401(a)(17) considered compensation of
$265,000, or $15,900). The $15,900 matching contribution is
treated as guaranteed payment income, subject to SECA and then
generally 100 percent deductible.
Thus, B, as a partner, is subject to SECA on its $400,000 “salary”
plus the $35,900 in payments that are made by the partnership for
B’s benefits, but are not excludable from SECA for total income
subject to SECA of $435,900. Thus, B will pay $29,424 in total
SECA tax ($18,130.50 on SECA up to $118,500, $2,363.50 on
amounts between $118,500 and $200,000, and $8,930 on
amounts in excess of $200,000). B can then deduct approximately
$13,668.
AlexCPA wrote:CO CPA wrote:I am reporting partner's 401k contributions as such:
$25,000 partner contribution to 401k - distribution rather than GP
$37,000 employer match + profit sharing - distribution rather than GP
I'm trying to wrap my head around this. Are you avoiding any reduction in partnership net income and self-employment income for each of the partners due to the employer match and profit-sharing contributions? That would mean that employer matching contributions for a non-partner employee would create a deduction whereas a matching contribution for a partner would not? This doesn't seem to be correct.
A document recently published by KPMG (https://assets.kpmg/content/dam/kpmg/pd ... 6-2016.pdf) states the following:Employer contributions to a qualified retirement plan—A partner is
allowed to participate in a qualified retirement plan of the partnership
and allowed to receive “employer” contributions. With regard to
defined contribution plans and most defined benefit plans, any
benefits or accruals on the partner’s behalf are treated as taxable
guaranteed payment income subject to SECA. The partner may
generally take a tax deduction for these contributions to the retirement
plan on the partner’s Form 1040.
Furthermore, there is an example as follows:B, an individual, owns a 5 percent interest in the profits and losses
of PRS an entity classified as a partnership for federal tax
purposes. PRS operates a law practice with respect to which B, a
licensed attorney, devotes his time and energy. In exchange for
his services, B is paid a “salary” of $400,000.
The “salary” paid to B likely should be characterized as a
guaranteed payment under section 707(c). As such, that payment
should be subject to self-employment tax under section 1402.
B participates in the partnership’s health plan and section 401(k)
plan. The $20,000 health premium paid by the partnership for the
partner is guaranteed payment income subject to SECA. Further,
B contributes $18,000 as an elective contribution to the
section 401(k) plan and receives a 100 percent match (capped at
6 percent of section 401(a)(17) considered compensation of
$265,000, or $15,900). The $15,900 matching contribution is
treated as guaranteed payment income, subject to SECA and then
generally 100 percent deductible.
Thus, B, as a partner, is subject to SECA on its $400,000 “salary”
plus the $35,900 in payments that are made by the partnership for
B’s benefits, but are not excludable from SECA for total income
subject to SECA of $435,900. Thus, B will pay $29,424 in total
SECA tax ($18,130.50 on SECA up to $118,500, $2,363.50 on
amounts between $118,500 and $200,000, and $8,930 on
amounts in excess of $200,000). B can then deduct approximately
$13,668.
How does treating the employer matching and profit sharing distributions as distributions reconcile with the above example?
The first exception relates to the difference between an exclusion for employees and a contribution with a deduction for self-employed individuals. As with other types of benefits, while contributions to a qualified retirement plan are excluded from income for an employee, they are treated as guaranteed payments on Schedule K-1 for partners, with an offsetting deduction depending on the type of contribution (e.g., 401(k) contribution, matching or profit sharing contribution, or contribution to a defined benefit plan).
AlexCPA wrote:Thank you for your response, dbaratz. In a paper called "Let's Look at the Big Picture: Partnership Compensation Issues from the Partnership and Benefits Perspective" published by someone from Deloitte Tax (https://scholarship.law.wm.edu/cgi/view ... ontext=tax), I noted the following (emphasis mine):The first exception relates to the difference between an exclusion for employees and a contribution with a deduction for self-employed individuals. As with other types of benefits, while contributions to a qualified retirement plan are excluded from income for an employee, they are treated as guaranteed payments on Schedule K-1 for partners, with an offsetting deduction depending on the type of contribution (e.g., 401(k) contribution, matching or profit sharing contribution, or contribution to a defined benefit plan).
Again, where are they getting that contributions to a defined contribution plan made on behalf of partners are to be treated as guaranteed payments? This is a common theme in a number of resources however they all fail to cite a source for this assertion. I'm not sure why this relatively simple question is so difficult to answer (although one might argue that that is the very nature of the tax code!).
Anyway, is there consensus that both the elective deferral contributions and profit-sharing contributions constitute separately-stated items which are NOT deductible to the partnership itself (and NOT necessarily guaranteed payments)?
Furthermore, how are employer matching contributions treated?
Any clarity on this would be greatly appreciated!
CaptCook wrote:Yes....payable to the plan at 12/31/20, deduction on the 2020 tax return.
CO CPA wrote:CaptCook wrote:Yes....payable to the plan at 12/31/20, deduction on the 2020 tax return.
ER contributions for shareholder are not deduction for the company. Are you confirming that what I have proposed is correct? (debit owner draw, credit owner draw payable)? There's no other way I can see. Thanks for your thoughts Capt!!
CaptCook wrote:CO CPA wrote:CaptCook wrote:Yes....payable to the plan at 12/31/20, deduction on the 2020 tax return.
ER contributions for shareholder are not deduction for the company. Are you confirming that what I have proposed is correct? (debit owner draw, credit owner draw payable)? There's no other way I can see. Thanks for your thoughts Capt!!
Aren't they shown in Box 13, Code M as a separately stated deduction?
CO CPA wrote:I have historically reported then in 13R. I believe that is correct - - don't have information in front of me confirming.
CaptCook wrote:CO CPA wrote:I have historically reported then in 13R. I believe that is correct - - don't have information in front of me confirming.
That's right....I was working solely from memory.
Users browsing this forum: Google [Bot], Google Adsense [Bot] and 49 guests