Language used by IRS and TTB states that the calculation of the SEP deduction for a self-employed person is "20% of net SE income after 1/2 SETax deduction..[ignore remainder of verbage]...."

But I've heard that 20% is interpreted to be AFTER the deduction for the SEP itself. An example best illustrates.

Black Bart reports Schedule C profits of $32,485. One-half of SE tax is $2485, so his base for calculation is $30,000. Which is true?

1. A simple calculation means Bart can put 20% of $30,000 into his SEP, or $6000.

2. The profit base INCLUDES the expense of the SEP. $6000 deduction means the business has profited only $24,000 and

Bart has exceeded his allowable SEP contribution. The allowable contribution is algebraically calculated at only $5,000,

Since $5000 is regarded as an expense, then the REAL income is $25,000, and the 20% criteria is met.

But I've heard that 20% is interpreted to be AFTER the deduction for the SEP itself. An example best illustrates.

Black Bart reports Schedule C profits of $32,485. One-half of SE tax is $2485, so his base for calculation is $30,000. Which is true?

1. A simple calculation means Bart can put 20% of $30,000 into his SEP, or $6000.

2. The profit base INCLUDES the expense of the SEP. $6000 deduction means the business has profited only $24,000 and

Bart has exceeded his allowable SEP contribution. The allowable contribution is algebraically calculated at only $5,000,

Since $5000 is regarded as an expense, then the REAL income is $25,000, and the 20% criteria is met.

## Comment