Form 1065 and Partner Simple Match

[Bjorn]

Tax Book Page 20-14

Re: Partners Simple Employer Match of $2959.00

Q # 1 How it this 3% calculated? My software does a nice job on the schedule C, but here I'm lost. I think my Ultra Tax is unable to get that number.

Why would Simple deferrals lower a guarantee Payment? I hope the answer is not please read page one of the instructions. The TAx Book says it is trying to keep it similar to the other example. I simply want to do it correctly for my client.

Believe it or not I have a degree, CPA and an enrolled agent behind my name and this just does not click in my brain.

Page 20-17 line 18 from a previous post is the EMPLOYESS 6,000 plus the EMPLOYEES 3% or 1088.00. This has nothing to do with the partners elective deferral. Correct.

Am I correct in saying that basically all the parrtners simple stuff hits Guarantee Payment and then right to K1 and should not hit the front of the 1065.

Mahalo

Bjorn.

[Brad Imsdahl]

TTB, page 13-18 in the example at the bottom of the first column explains how the employer’s match is calculated for a partner in a partnership. You take the line 4, Schedule SE amount and multiply it by your 2% or 3% match. You then add the partner’s elective deferral to the employer’s match and enter that on the K-1, line 13, code Q, and deduct it on line 28 of the 1040. It is a separately stated item on the K-1 so no deduction is taken for it on the front of the 1065. This is explained in the instructions for Form 1065. IRS Pub 560 explains that for a SIMPLE plan, net earnings from self-employment is the amount on line 4 of Short Schedule SE.

TTB, page 20-20 explains how the amount on line 4 of Schedule SE was determined for Carol, one of the two partners in the example. A similar calculation was used for the other partner to arrive at the $2,959 amount shown on page 20-14. The author’s comment on page 20-20 provides additional explanations, as you have to factor out other amounts flowing to line 4 that are not from that specific partnership, such as another unrelated Schedule C business.

As to why guaranteed payments were reduced by the elective deferrals, TTB page 20-13 explains this was simply to make the example more closely correspond with the contributions in the C corporation example and the S corporation example in Tabs 19 and 20. That is not a rule that you must follow. We wanted the numbers to more closely match the other examples, so we simply reduced the guaranteed payments accordingly. Guaranteed payments paid to each partner are an arbitrary number. It is something the partners in the partnership agree to pay each other. So in this case, the partners agreed to reduce their guaranteed payments by their SIMPLE elective deferrals. The reason why they agreed to do that is not important. In real life, they would not have, but because of our other examples, these partners agreed to do so.

Also, keep in mind that if we had not reduced guaranteed payments for the SIMPLE elective deferral, the line 1 of the Schedule K would have decreased by the same amount, as guaranteed payments are a deduction on the front of the 1065, resulting in the same amount flowing to the combined line 4 amounts for both partner’s Schedule SE. So it really does not matter how you do it. We did it that way to be closer to the C corp and S corp examples. The only difference is the individual SE tax calculations of each partner would have been slightly different as guaranteed payments are not based on the partner’s ownership interest percentage. The line 1 of the K-1 amounts are.