1040-US: Screen Keogh is Grayed Out for an S Corporation

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Question

Why is Screen Keogh grayed out when the Schedule K-1 is from an S Corporation?

Answer

S-Corporation shareholders do not meet the definition of a self-employed individual. The 1040, page 1 deduction for retirement plan contributions is available only for those individuals that are self-employed. Since S-Corporation shareholders are employees under the law, the S-corporation deducts contributions made on behalf of the shareholder on line 17 of the 1120S return. Per IRS Publication 560, Retirement Plans for Small Businesses (page 5, in the Net earnings from self-employment section), "Net earnings include a partner's distributive share of partnership income or loss. It does not include income passed through to shareholders of S corporations."

Furthermore, contributions to a retirement plan can be made only from compensation, which, in the case of a self-employed individual, is earned income. Although an S-corporation shareholder may receive distributions similar to distributions that a partner receives from a partnership, distributions received as a shareholder of an S corporation do not constitute earned income for retirement plan purposes (see IRC sections 401(c)(1) and 1402(a)(2)).

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