Can a 401k shelter K-1 income?

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Subject Author Date Can a 401k shelter K-1 income? kastnna 07-14-2009  Re: Can a 401k shelter K-1 income? paulthomascpa 07-14-2009  Re: Can a 401k shelter K-1 income? kastnna 07-14-2009  Re: Can a 401k shelter K-1 income? Gene E. Utterback, EA, RF... 07-14-2009  Re: Can a 401k shelter K-1 income? HLunsford 07-27-2009
Posted by kastnna on July 14, 2009, 9:38 am Please log in for more thread options I have a 5 member LLC that owns comercial real estate for which the LLC receives rents. The members receive pass-through income and a K-1 annually. Can this income be diverted into a qualified retirement plan (either employee or employer, doesn't matter which)? Thanks -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Posted by paulthomascpa on July 14, 2009, 10:34 am Please log in for more thread options >I have a 5 member LLC that owns comercial real estate for which the > LLC receives rents. The members receive pass-through income and a K-1 > annually. Can this income be diverted into a qualified retirement plan > (either employee or employer, doesn't matter which)? > Nope. At least not as it is currently distributed to the partners. Rental profits retain their "not earned" status - ie: not subject to SE or employment tax. Only earned income, subject to Self-Employment or payroll taxes, can be used for any qualified plan like an IRA, 401k, SEP, etc. Rental profits never have been allowed for that purpose. -- Paul Thomas, CPA www.paulthomascpa.com -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Posted by kastnna on July 14, 2009, 12:56 pm Please log in for more thread options wrote: > Nope.  At least not as it is currently distributed to the partners.  Rental > profits retain their "not earned" status - ie: not subject to SE or > employment tax. > > Only earned income, subject to Self-Employment or payroll taxes, can be used > for any qualified plan like an IRA, 401k, SEP, etc. > > Rental profits never have been allowed for that purpose. > Thank you, sir. I suspected it was an "earned v. unearned" issue. -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Posted by Gene E. Utterback, EA, RFC, AB on July 14, 2009, 4:34 pm Please log in for more thread options > wrote: >> Nope. At least not as it is currently distributed to the partners. Rental >> profits retain their "not earned" status - ie: not subject to SE or >> employment tax. >> >> Only earned income, subject to Self-Employment or payroll taxes, can be >> used >> for any qualified plan like an IRA, 401k, SEP, etc. >> >> Rental profits never have been allowed for that purpose. >> > > Thank you, sir. I suspected it was an "earned v. unearned" issue. True, BUT maybe the earnings, or some of them can be recategorized. If the LLC members actively participate in the management of the rental COULD they draw a salary (or since it's an LLC guaranteed payment to members) and consequently reclassify those draws as earned income, subject to SE tax? I don't know the answer, but I have several clients who've raised the question and I'm looking into it. I have not had particularly good luck in finding anything that specifically allows this - BUT neither have I found anything that expressly prohibits it either. And yet, I'm still not comfortable in sanctioning it. Good luck, Gene E. Utterback, EA, RFC, ABA -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Posted by HLunsford on July 27, 2009, 8:52 pm Please log in for more thread options Gene E. Utterback, EA, RFC, ABA wrote: >> wrote: >>> Nope. At least not as it is currently distributed to the partners. Rental >>> profits retain their "not earned" status - ie: not subject to SE or >>> employment tax. >>> >>> Only earned income, subject to Self-Employment or payroll taxes, can be >>> used >>> for any qualified plan like an IRA, 401k, SEP, etc. >>> >>> Rental profits never have been allowed for that purpose. >>> >> Thank you, sir. I suspected it was an "earned v. unearned" issue. > > True, BUT maybe the earnings, or some of them can be recategorized. > > If the LLC members actively participate in the management of the rental > COULD they draw a salary (or since it's an LLC guaranteed payment to > members) and consequently reclassify those draws as earned income, subject > to SE tax? I don't know the answer, but I have several clients who've > raised the question and I'm looking into it. I have not had particularly > good luck in finding anything that specifically allows this - BUT neither > have I found anything that expressly prohibits it either. > > And yet, I'm still not comfortable in sanctioning it. > I guess that's why I favor having LLC's choosing the S corporation option. ChEAr$, Harlan Lunsford, EA n LA -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Similar Threads Posted 401K for W-2 job, plus "individual" 401K for 1099 income ? March 17, 2008, 8:28 pm Solo 401K (aka Individual 401K) same as Super-Simplified 401K? 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