In computing SEP deductible contribution limits for a self-employed person with no employees, would you take into account UPE from an unrelated partnership?

[TomK2023]

If you are self-employed, you can contribute to a Simplified Employee Pension (SEP) IRA as much as the lesser of 25% of your net earnings or up to $61,000 for 2022.

[Zoltan2016]

@TomK2023 Thank you.  I am aware how the limitation works.  Let me be more specific.  I have my own business and a SEP related to that business.  Separately, I have a UPE from a limited partnership that I do not control.  The only item I have from that partnership is the UPE.   In computing net business profits for determining the SEP contribution limit, does the unrelated UPE reduce the profits from the business that has the SEP?

Based on the below, taken from IRS publication 560's definition of net earnings from self-employment, I think the answer is it should not, but turbotax's software seems to disagree.

"Net earnings include a partner's distributive share of partnership income or loss (other than separately stated items, such as capital gains and losses). They don’t include income passed through to shareholders of S corporations. Guaranteed payments to limited partners are net earnings from self-employment if they are paid for services to or for the partnership. Distributions of other income or loss to limited partners aren't net earnings from self-employment."

Thanks for your thoughts on this.

[DaveF1006]

Unreimbursed Partnership Expenses should not affect your SEP contribution because this is from a separate business. Your limited partnership activities should have no impact because this is passive income generated from a partnership interest.  This is like having an investment account or a retirement account.

Now my question to you is, how is your income reported on your k-1. if it is reported as business income, then this may be why the UBE expenses are reducing self-employed income because of the reduction of earned income. See if the income from this k-1 is reported in Box 1 and let me know the answer.

[Zoltan2016]

Thank you @DaveF1006 .  I appreciate the confirmation.   It is line 14, but turbo tax calls that partnership gain or loss unless you pick a farming alternative, which is not my situation.  The problem may be that it is not passive.  It relates to a consulting firm.   I understand that the UPE would affect my SE Tax, but I still thought that based upon the IRS guidance quoted above it should not affect the SEP calculation for my own business.

Turbo tax starts the SEP calc by pulling net profit from self employment from the SE Tax worksheet, so if my understanding of the law is correct, I need a workaround.  Would I make an adjustment in part II 1(b) of the Keough/SEP worksheet?

Thoughts?   

[DaveF1006 · Accepted solution]

Yes, I read that in IRS Publication 560 on page 6. Yes,  you may make an adjusting entry in part 2 Box B to add the amount of UBE back so you can claim your full contribution.  The form will let you make that entry without an override.

Let me know if this works so i can retain this for future reference.

@Zoltan2016 

[Zoltan2016]

@DaveF1006 thank you.  It does work.  I also did a little research and I think the legislative support for that publication is in the definition of Net Earnings from Self-Employment in section 1402(a) which says you include the distributive share of income or loss, which would not include UPE.  1402(a) is referenced by 401(c)(2)(A), which is referenced by 401(c)(1), which is referenced by 408(k)(8).

[DaveF1006]

You, my friend, have done your research. This experience has been educational for me and thank you so much for sharing this. You have a great rest of your year.

[Zoltan2016]

I am actually a recovering tax professional, just all on the corporate side, a little partnership.  The personal income tax stuff is new for me, so thank you for being a great partner in sussing this out!