Sept Deduction-partnership

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I have a partnership that is contributing to the SEP accounts of the partners. The contribution is listed on the partner's K-1's. It was calculated for each partner based on the partnership's share of partnership income and the partner's guaranteed payments less 1/2 of the SE tax. Has anyone ever heard that on the partners PERSONAL RETURN (1040) the SEP contribution would also have to be reduced by unreimbursed employee expenses i.e. mileage. Am I missing something here? What does a schedule A Misc Expense deduction have to do with reducing the amount of the Partnership's income that the SEP contribution was calculated on?
HELP! PLEASE.

[Bees Knees]

A partner can deduct unreimbursed partnership expenses on Schedule E rather than Schedule A. The unreimbursed expenses also reduce the partner's income subject to SE tax.

Since a self-employed individual generally calculates retirement contributions on SE taxable earnings, logic would seem to suggest earnings must first be reduced by unreimbursed partnership expenses.

However, it is the partnership, and not the partner who must make the contribution on behalf of the partner. The partnership has no way of knowing what the unreimbursed expenses are because those expenses are incurred outside the partnership. Therefore, unreimbursed expenses are treated like a loss from another activity. They do not reduce earnings used by the partnership to calculate retirement contributions.

It would be identical to a partner who has self employment earnings from the partnership being wiped out by a loss from a separate Schedule C activity. Net earnings subject to self employment tax would be zero, but the partnership can still contribute to the partner's retirement account, since the Schedule C activity is outside the partnership.

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1040 SEP reduced by Sched E

Hi Bees Knees,
Thank you for your response. I was searching last night and found one of your previous posts to someone else. That sent me in the right direction i.e. the Schedule E. That makes sense to me.
My question now is, do I have to change the Partnership Return? The K-1 shows a higher deduction than they are actually taking on their 1040.

Thanks for your responses. You post alot of very useful and knowledgable information on here.

[Bees Knees]

The K-1 should show the actual amount the partnership is contributing. Remember, it is the partnership that actually writes out the check for the SEP, not the partner.

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Thanks Again

Thanks again Bees. I found this in the Schedule E instructions:
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Unreimbursed Partnership Expenses
You can deduct unreimbursed ordinary and necessary partnership expenses you paid on behalf of the partnership on Schedule E if you were required to pay these expenses under the partnership agreement (except amounts deductible only as itemized deductions, which you must enter on Schedule A).

Enter unreimbursed partnership expenses from nonpassive activities on a separate line in column (h) of line 28. Do not combine these expenses with, or net them against, any other amounts from the partnership.

If the expenses are from a passive activity and you are not required to file Form 8582, enter the expenses related to a passive activity on a separate line in column (f) of line 28. Do not combine these expenses with, or net them against, any other amounts from the partnership.

Enter “UPE” (unreimbursed partnership expenses) in column (a) of the same line.
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If UPE is used, it does deduct the amount of the SEP deduction on the 1040. If the partnership already made this contribution to the partner's SEP, wouldn't they then have to take the excess contribution back out so the partner isn't penalized for an over contribution? Very messy. I've advised the client to do an accountable plan next year so the expense will come directly out of the partnership before any SEP is calculated.
Thanks again!

[Bees Knees]

I stand corrected. You are absolutely correct. The partner’s SEP is figured after reducing self-employment earnings for the unreimbursed partnership expense deduction.

IRS Pub 560, page 21, has a worksheet that self employed taxpayers (including general partners) use to calculated their SEP deduction on line 28 of Form 1040. Step 1 says a general partner starts with self employment earnings reported in box 14 of the K-1. That amount must then be reduced by all partner expenses used to calculate the amount reported on the partner’s Schedule SE, line 1 or 2.

This is basically the same hoop that a Schedule C taxpayer must jump through, only it makes things much more complicated for partnerships. We all understand how a Schedule C taxpayer has to basically complete his 1040 before we can calculate the maximum SEP contribution allowed.

This worksheet is basically saying the same thing for a self employed general partner of a partnership. The partner has to complete the 1040 including figuring all deductions in arriving at line 1 or 2 of Schedule SE before being able to calculate the amount that the partnership can contribute to that partner’s SEP. This requires the partnership to coordinate the completion of Form 1065 with each partner’s completion of their individual 1040s. The partnership cannot contribute to each partner’s SEP until each partner informs the partnership what his or her maximum SEP contribution is allowed. If the partnership does not wait for this information, the partnership runs the risk of over contributing to the SEP account of a partner, and any excess would then be subject to excess contribution penalties.

I suppose a solution to this problem could also be solved if the partnership waits until after the first of the following year to make the SEP contributions. That way any excess can simply be treated as a partial contribution to the following year SEP amount.

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Accountable Plan

Hi Bees, Next year I will be having the partners get reimbursed by the partnership so they won't have this problem. Since the partnership is generating enough income for a SEP contribution, it can certainly reimburse the partners for their personally paid partnership expenses.

Thanks for all your help.