SEP Contribution - S Corp. expense?

[Unregistered]

Is a SEP contribution treated as an expense at the S Corp. level or does it just get picked up on the individuals return. The only employee is the shareholder.

[JON]

Sep

is an employer contribution taken as a deduction only by the corporation.

[Unregistered]

Thanks Jon,

That is what I thought. The previous preparer did not report it as such. and I wanted to make sure I was right.

[OldJack]

is an employer contribution taken as a deduction only by the corporation.

Well not necessarily. A self-employed person can setup a SEP and deduct it on his 1040, page 1. Actually a SEP contribution is a deduction by the "employer" regardless of the type of entity.

[Bees Knees]

yes necessarily

An S corporation shareholder is not considered self employed. Therefore, an S corporation making a SEP contribution on behalf of the shareholder/employee takes the deduction on the 1120S.

[cynamoats]

And how are SEP contributions treated for members of a LLC? Are they deductible on the Form 1040 of the member or just on the accounting records of the LLC?

[Bees Knees]

LLCs taxed as partnerships report retirement plan contributions (including SEPs) on line 13 of the K-1 for each partner using code R. The partners then use that amount to enter on the front of their 1040 return.

[cynamoats]

Adding an additional question to this one ..

I understand what Bees Knees has explained. Because I have never had a client who has used the Sep for a S CORP or LLC, here are some additional questions that I hope someone is kind enough to explain.

LLC - Members each taking $ 2000 Sep - the check is being written out of the LLC checkbook to fund. As per prior explanation, each member reports from the Line 13 on K1 and it sounds as thought this will flow through on Sep deduction - adjustment to income.

However, two issues, since the LLC is writing the check in Year 2006, how is it treated? As a DRAW to each member? It isn't a reduction of profit since the members report directly on their returns. Correct?

SECOND SEP question - S Corp officer wants to maximize Sep for Year 2005. I understand report in box 14 and the Corporation takes the deduction. HOWEVER, plan hasn''t even been established, W2 has been printed. Does the Corp take the Pension Expense in Year 06 since it isn't written until 06 or do I accrue the deduction and report it on the tax return??

If someone would like to email me directly, my email is cynamoats@aol.com. Thank you so much for any quidance. I have read as much as I could but to me these above items of ways to treat these Seps are not explained.

[oceanlovin'ea]

S Corp questions

The SEP plan must be set up by the due date of the return and the contribution made. So when you prepare the return you know what your contribution will be. In fact when you close the books in December you will have probably made the decision as to the amount of the contribution.

An entry is made in the December books that expenses the contribution and sets it up as a payable. This means that the contribution made by the corporation is included in the expenses.
It does not flow through to the employee/owner. Shouldn't appear on W-2 anywhere, I don't think.
I would think that a partnership would be the same. The contribution is included with the expenses. It is the bottom line that is divided between partners and flows to their return.

Hope this helps.

Linda F

[Bees Knees]

For your first question, I agree with Linda’s answer, that it is set up as a payable so that for book purposes, the contributions are treated as an expense to the partnership, which does reduce the bottom line profits of the partnership.

However, for tax purposes, that reduction of profits is not reflected in the K-1 line 1 ordinary business income line. It is separately stated on line 13 as a deduction for each partner, so that each partner reports his or her share of the contribution that is actually made to his or her SEP. When you get to the Schedule M-1 reconciliation of income (loss) per books with income (loss) per return, it balances because the SEP contributions are reflected on the books, and also are reflected on line 1 of the analysis of net income (loss) at the top of page 4 of Form 1065. So no adjustments need to be made on Schedule M-1 and everything balances.

The second question is the same answer that Linda gave. Set it up as a payable and deduct it for book purposes and tax purposes. Reporting it on the W-2 box 14 is just for information purposes. It doesn’t affect any of the tax calculations from the W-2. So even if the W-2 is already printed without the information, that’s OK. The contribution will reduce net profits that flow through to the shareholders on their K-1, and the S corp shareholder does nothing with his or her 1040 regarding the contribution.

[oceanlovin'ea]

Thanks

Bee Knees for clearing up the partnership handling of the contribution.

I have done single owner s corps and knew how to do them, but had not done a partnership with sep contributions. So thanks for giving the correct information. And that makes perfect sense.

Linda F