Aggressive SEP deduction

[Snaggletooth]

Tell me if this would fly. I know the math would work, I simply don't know whether it is too audacious for some of us to do.

Situation is high-income taxpayer in 31% tax bracket. Spouse is self-employed with another $60K in self-employment income.

SEP entered on line 28 would have the bottom-line effect of 31% recovery of taxes. SEP entered on line 14 of Schedule C will have a much superior bottom-line effect of some 45% recovery. There are no employees, unless you can consider the proprietor as an employee.

I don't think this is what IRS had in mind. But is it prohibited? Is it advisable? Is there a court case?

Comments appreciated.

[S T]

from IRS Pub 560

Where To Deduct Contributions
Deduct the contributions you make for your common-law employees on your tax return. For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040), Profit or Loss From Farming; partnerships deduct them on Form 1065, U.S. Return of Partnership Income; and corporations deduct them on Form 1120, U.S. Corporation Income Tax Return, or Form 1120S, U.S. Income Tax Return for an S Corporation.

Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040. (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc., you receive from the partnership.)

Remember that sole proprietors and partners can't deduct as a business expense contributions made to a SEP for themselves, only those made for their common-law employees.

Also TTB 13-16 - Where to deduct

From my readings it is prohibited for a Schedule C deduction, however, if the business is an LLC with election for C or S or the business is a C or S - then it will flow through for the owner as well as any employees on 1120 or 1120S - The owner then is treated the same as any other employee.

Note: Do NOT make the mistake of deducting SEP contributions made for yourself on Schedule C (or F) if you are self-employed.

Note: If you are a member of an LLC that made an election to treat the LLC as either a C or S Corporation for tax purposes, SEP contributions for yourself, as well as your employees, are deducted on Form 1120 (for a C corp.) or 1120S (for an S corp.). In other words, you are treated as an employee, the same as any other employee.

I am not good on cites or court cases, so hopefully someone else will post


Another one of those disparities that Schedule C sole properietors encounter on tax returns.

[DaveinTexas]

Not aggressive, just not allowed

This doesn't answer your question but maybe your client should consider a Solo 401K. She could contribute up to $35,000 with a Solo K versus only $11,000 with a SEP IRA.

Here's a handy dandy calculator to compare various retirement plans....http://www.bankrate.com/calculators/...alculator.aspx

Here's your answer from the IRM by the way:
4.72.17.10.3 (09-12-2006)
General Reporting Requirement

"SEP contributions by corporate employers are deducted on Form 1120. Employers who are sole proprietors deduct contributions on Schedule C of Form 1040 and deduct contributions made for themselves on Form 1040. Partnerships deduct contributions made for common-law employees on Form 1065; but report on Schedule K-1 contributions made for partners, who deduct such contributions on their own returns."

I agree it is misleading but if you think about it, the "contributions" mentioned in the 2nd sentence is referring to contributions for other employees.....implied in the last part of the sentence.

[Snaggletooth]

Thanks to All

for responding...to Dave and Sandy. Looks like my "aggressive" plan is simply not allowed.