Let’s talk about guaranteed payments to partners, and about ways to contribute to an IRA or 401K when one lacks earned income…
Scenario:
Husband and wife own rental real estate assets in a holding company on the right side of trifecta. “Joe & Jane Assets.”
Husband and wife run an operating company on the left side of trifecta, serving as a management or consulting company. “Joe & Jane Mgmt.”
Neither company has any employees.
Both companies file taxes as partnerships, as the operating company isn’t yet making enough to merit filing as an S-corp.
Joe & Jane Mgmt is a 10% partner in Joe & Jane Assets, and receives guaranteed payments to partners for it’s role in handling the business/assets of Joe & Jane Assets.
Given this…
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Do these guaranteed payments become earned income for the operating company?
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Assuming yes, does this enable the Joe & Jane to contribute to a solo 401(k) because of their income from the operating company?
(It wouldn’t have worked with income from Joe & Jane Assets, because that’s passive income, but does it work with income from Joe & Jane Mgmt?) -
Would this be any different if Joe & Jane Assets was primarily flipping houses rather than renting them, so receiving capital gains income rather than passive rental income?
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Finally, if the above structure works to convert some holding company income to earned income in the management company, is there any reason that the same structure couldn’t also work if the holding company is flipping a different type of assets than real estate - including trading stocks, crypto, etc?
This is not a gotcha relative to my prior question in episode #597.
Rather, it’s an attempt to understand the rules here, and the specific treatment of guaranteed payments to partners.
You were so busy joking in episode #597 that I didn’t get a clear understanding of the principles.