Rev. Ruling 83-15: Tax Rules for Partner Retirement
Understand the tax reporting flow for partner retirement contributions. This guide clarifies how payments are treated as distributions under Rev. Ruling 83-15.
The Internal Revenue Service (IRS) provides rules that address the tax treatment for retirement plan contributions made by a partnership for its partners. This guidance is necessary because of the distinct legal and tax relationship between a partnership and its partners. Unlike a typical employer-employee relationship, a partner is considered a self-employed individual, not an employee of the partnership. This distinction changes how payments made on their behalf are handled for tax purposes, ensuring contributions are accounted for in a manner that reflects the pass-through nature of a partnership.
The Ruling’s Core Principle
When a partnership makes a retirement plan contribution on behalf of a partner, the payment is treated as a “guaranteed payment.” Guaranteed payments are made to partners for services or the use of capital and are determined without regard to the partnership’s income. This treatment allows the partnership to deduct the contribution as a business expense, similar to how it would deduct a salary paid to a non-partner employee.
This stands in contrast to a simple distribution of profits, which is a sharing of the partnership’s earnings and is not deductible by the partnership. By classifying the retirement contribution as a guaranteed payment, the tax code recognizes it as compensation for the partner’s work.
Partnership Reporting Requirements
From an accounting perspective, the partnership records the retirement contribution as a guaranteed payment to the specific partner. When the partnership prepares its annual tax return, Form 1065, U.S. Return of Partnership Income, the retirement contribution is deducted as a guaranteed payment.
This information is then passed to the partner via their Schedule K-1, which breaks down each partner’s share of the partnership’s income, deductions, credits, and other items. Specifically, the retirement plan contribution is included in Box 4 of the Schedule K-1 as a guaranteed payment.
Partner Tax Deduction and Reporting
Upon receiving the Schedule K-1 from the partnership, the partner must report the guaranteed payment as ordinary income on their personal tax return. The amount found in Box 4 of the K-1 is added to the partner’s other income. However, the partner is entitled to a corresponding deduction for the retirement contribution.
The partner reports this as a deduction on Schedule 1 of Form 1040, which is used for “Additional Income and Adjustments to Income.” There is a line designated for deductions for self-employed SEP, SIMPLE, and qualified plans. By placing the contribution amount on this line, the partner reduces their adjusted gross income (AGI), which lowers their overall income tax liability for the year. This effectively cancels out the income inclusion from the guaranteed payment.
The amount a partner can deduct is subject to annual limits based on their net earnings from self-employment, which is calculated from their share of partnership income.
Contrasting Treatment in Other Business Structures
The tax treatment for partnerships differs from other business structures like S and C corporations. In an S corporation, a shareholder who owns more than 2% of the company’s stock and is also an employee receives different treatment. When the S corporation makes a retirement contribution for such a shareholder-employee, the amount is included in the shareholder’s wages on their Form W-2. The S corporation then takes a deduction for the contribution as a business expense, just as it would for any other employee. The shareholder-employee does not take a separate deduction on their personal return because the benefit is already reflected in the corporate-level deduction.
For a C corporation, contributions made to a retirement plan for a shareholder-employee are treated identically to contributions for any non-owner employee. The corporation deducts the full amount as a business expense on its Form 1120, U.S. Corporation Income Tax Return. There is no special reporting or pass-through mechanism, as the C corporation is a separate taxable entity from its owners.