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Discussion:Partnership SEP Contribution with UPE

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Discussion Forum Index --> Advanced Tax Questions --> Partnership SEP Contribution with UPE


Discussion Forum Index --> Tax Questions --> Partnership SEP Contribution with UPE

LemRI (talk|edits) said:

January 3, 2011
Client is a 50% partner of XYZ. His earnings are approximately $10,000 from the partnership. He also has approximately $2,000 of UPE. Should the SEP contribution be based on his $10,000 of partnership earnings, or $8,000 of earnings subject to SE tax?

If the partnership already made the contribution based on his $10,000 worth of earnings, even though he was only entitled to it based on $8,000, is the contribution allowed and just no deduction allowed, or should the amount be withdrawn from the partner's SEP-IRA account?

Lalva (talk|edits) said:

19 March 2014
I have this same question. Do we use the maximum contribution from the personal return, with the UPE factored in? In that case, the percentage is going to change from member to member, right? How do you do that at the Partnership level?

Any guidance is greatly appreciated.

Ckenefick (talk|edits) said:

19 March 2014
Yes.

Right.

What do you mean with your last question?

Lalva (talk|edits) said:

19 March 2014
Thank you for your answers Chris.

My last question is regarding this SEP IRA rule that for partnerships the contribution has to be done at the Partnership level (LLC in this case), and passed to the partner in the K1.

And if the UPE is going to be different for each partner how much can be contributed (if they want to contribute the maximum possible? The 1065 has to be finished before the 1040 of the partners.

Am I making any sense? This is the only 1065 that I prepare and even though I am studying and learning as much as possible still there are things that scape me.

Ckenefick (talk|edits) said:

19 March 2014
Don't think contrib has to be made at the partnership level.

Doug M (talk|edits) said:

19 March 2014
Agree with Chris. A SEP at the partnership level is really an information item on the K-1. It is not a deduction on the partnership tax return, except to the extent of eligible employees.

Ckenefick (talk|edits) said:

19 March 2014
I think Lavla's issue might be that the partnership is actually writing the checks into the SEP accounts...maybe...that is, we complete the 2013 partnership return, aside from the SEP contributions for the rank and files, decide on the contribution percentage for everyone (including the eligible rank and files), and then in 2014, by the extended due date, we cut checks out of the partnership directly into the SEP accounts, including the SEP accounts of the partners.

And then, as it turns out, we contributed say 10% for the rank and files, 10% for partner #1 and then 13% for partner #2 (b/c partner #2 had personal UPE, thereby driving down his net earnings from self-employment, making his "already made" contribution a larger percentage than everyone else's).

So, I think we can solve this problem by not cutting the partner SEP checks directly from the partnership to the partner SEP accounts. Part of this hinges on whether or not there are rank and files. If there are, we probably need to decide on the percentage first (b/c the contribution to the rank and files will likely be accrued and will reduce current year net earnings from S/E for the partners). So, if we go 10% for the rank and files, then we must use the same percentage on the partner 1040's...so then compute the partner dollar amount SEP contributions on their current year 1040's...and then, the partners make those dollar amount contributions personally. If they need cash from the partnership to do so, said cash withdrawals s/b booked to distributions or gtd pmts, or some combination, as the case may be.

So, that's my take. I think Lavla is saying that the partnership contributes 10%, or $10k for partner #2, but b/c of partner #2's UPE, the $10k turns out to be 13% of his net earnings from S/E...and at which point, the contribution was already made...and there's no going back.

DebP (talk|edits) said:

19 March 2014
Here's my take - my client receives a K-1, with a detailed explanation " $10,000 represents maximum 2013 profit sharing plan contribution only if unreimbursed business expenses are not deducted against self-employment income on individual Schedule E." That was quite a supplemental statement on a K-1 - but clearly others see the issue as well. So we know there is a problem out there. Either you don't take UPE - which often is tricky because you need to look deep into the partnership agreement to see if UPE is even allowed, OR you reclass some of the contribution toward the next year OR you don't cut the check at the partnership level.

Lalva (talk|edits) said:

19 March 2014
Thank you all for your input! This helps a lot.

I am confused because I read this in the IRS website:

Can each partner in a partnership maintain a separate SEP plan?

No, only an employer can maintain and contribute to a SEP plan for its employees. For retirement plan purposes, each partner or member of an LLC taxed as a partnership is an employee of the partnership.

My clients have a two member LLC taxed as a Partnership.

Thank you again.

Ckenefick (talk|edits) said:

19 March 2014
What that means is that the Plan must be established and maintained through the partnership...that is, one partner cannot unilaterally set up his own SEP, while the other partner decides to do nothing. Since partners are treated as "employees" for this purpose, we'd have a violation since the percentage isn't uniform for all "employees" - one partner contributes x% and the other is 0%.

Lalva (talk|edits) said:

19 March 2014
OK, so as long as all the partners contribute the same % we are good, right? So each one will contribute the % on the net after UPE.

Thanks!!

Ckenefick (talk|edits) said:

19 March 2014
Right...And, if the partnership will basically be paying for these contributions, by distributing cash in some way, shape, or form, it ought to do so equally, if the partners agree to it. So, if one guy can contribute $12k and the other guy only $10k, partnership should distribute $12k to each of them (with $10k of each amount being a distrib and the other $2k to the one guy being a gtd pmt). Or, all amounts being gtd pmts. Whatever. But the one guy that can only contribute $10k, should think about making an IRA contribution (even a non-deductible one) with the extra $2k he gets (that he can't put into his SEP).

DebP (talk|edits) said:

19 March 2014
And if you make it as a draw, you should have a supplemental statement on the bottom of each K-1 stating the contribution amount. That way if other people prepare the individual returns, they know the amount to deduct.

Lalva (talk|edits) said:

19 March 2014
Thank you!

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