CPA Exam Study Conveys SEP-IRA Options for Partners

March 29, 2012 by  Filed under: Taxes 

A person choosing to become a certified public accountant aims to develop a reputation as a trusted source of financial advice. A CPA who delivers helpful information is certain to attract clients. Many of the questions a CPA receives entail the multi-faceted area of tax rules for small businesses.

In some cases, small business owners have obtained incorrect details. This creates an opportunity for CPAs to convey clear answers. An example from CPA exam study illustrates the point. One of the first steps taken by small business owners after achieving some success is creating retirement plans. This generates a tax deduction for current year contributions to a plan and shelters future earnings from any immediate tax impact.

More than mere overviews of retirement plans – such as a SEP – are taught in a CPA examination course. Training includes understanding the features of such arrangements plus how they apply to specific situations. For instance, equal partners in a partnership can each have SEP-IRAs. But the contributions are not necessarily equal amounts to each partner’s account. Significant confusion often arises when partners have unequal ownership.

A partnership that creates a SEP for the partners must include other employees of the business. Contributions to each SEP-IRA are proportional to individual earnings. The determination of earnings for employees is obviously their wages. But partner earnings for purposes of calculating retirement plan contributions are determined a little differently. The formula for determining self-employment earnings is a critical component among the details learned from CPA exam study material.

Partners certainly do not automatically receive the same contribution amounts to their respective SEP-IRAs. But they do receive the same contribution percentage of their individual self-employment earnings. This only occurs if the partnership creates the SEP. In that event, the partnership’s tax deduction for retirement plan expenditures reduces the pass-through income reported for the partners’ personal tax returns. Plus, added to a partner’s taxable income is his proportionate share of SEP contributions. Consequently, partnership funding of SEP-IRAs is not much of an advantage.

Fortunately, CPA courses address an alternative way for partners to fund SEP-IRAs. That is, each individual partner can make SEP-IRA contributions from personal funds. This is especially common when the partnership has employees. By funding their own SEP-IRAs, the partners don’t use partnership money and can therefore exclude other workers. In fact, any particular partner can choose to not even have a SEP-IRA. Only the partners who wish to fund retirement plans end up doing so.

Any partner may also have self-employment income from sources other than the partnership. The role of a CPA therefore usually necessitates advising individual partners in addition to providing tax services to their partnership.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

Fast Forward Academy is a leading publisher of education for become a certified public accountant and tax professionals. Access to free questions for the CPA exam study is available on their website.

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