JanZtax wrote:

- quote -

IRA vs. SE income: Technically, one way of reading IRC
219(b)(1)(B) would exclude the indirect expenses (lines 8 to
about line 28, depending on the year of the form) on the
Schedule C as ONLY inventory costs, including returns and
allowances, are part of "gross income" from IRC 61. The
indirect expenses fall under IRC 62(a)(1) as an adjustment
to GI to arrive at AGI. Therefore, there is support for
such an interpretation in IRC section 219(b).

Now, IRC 219(f)(1), where compensation is defined as
including earned income, is the kicker. It cross-references
IRC 401(c)(2) which defines "earned income" as NET earnings
from self-employment as per IRC 1402(a), which makes clear
that it is gross income LESS allowable deductions
(apparently, even those which are not part of GI but are an
adjustment to arrive at AGI). If the Court wishes to say
that these AGI-only expenses don't count and that only the
GI-included expenses (inventory costs) count, that
interpretation would lead to the conclusion you ask about in
your question.

I do see a possible, inherent conflict between IRC 1402(a)
and 219: 1402 seems to want to include expenses that 219's
language doesn't. That gives the Court the right to step in
and clarify.

I also note that I see nothing pertaining to IRC 63(c)(5)(B)
that would lead to a different definition of "earned
income." However, IRC 219(f)(1)'s definition and limitation
via IRC 401(c)(2) -> IRC 1402(a) doesn't apply since
219(f)(1)'s application is limited - i.e. "For purposes of
this paragraph, ....."

I also looked at IRC 32's definition of "earned income" and
find that it is interesting that it also references IRC
1402(a) to mean NET self-employment. That implies to me that
the reference in IRC 219 is redundant. Also noted in the
post-1990 version of IRC 32(c)(2)(A)(ii) was the reduction
of EI by the 50% of SE Tax deduction (and that non-resident
aliens don't qualify for EIC).

Therefore, apparently every instance of "earned income" has
a slightly different definition. Blame Congress. :-)

Since all of the instances talk about a NET SE INCOME and
don't address a net loss, I would agree that using wages
ONLY is a valid conclusion. I will further agree that if
there were a net income BEFORE the indirect expenses of
self-employment, but a net loss after considering those
expenses, that such an amount CAN be added to wages for the
purposes of any section that uses the term "earned income"
WITHOUT a reference to IRC 1402 in its definition.

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anZtax wrote:

- quote -

It must already be written into law as every Pub 590 I have
(back to 2000) states that SE losses are not to be netted
against wages for purposes of taxable compensation.

===========Begin Text==============================
Self-employment loss. If you have a net loss from
self-employment, do not subtract the loss from your salaries
or wages when figuring your total compensation.

--
Alan
http://taxtopics.net

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"JanZtax" <janztax[at]aol.com> wrote:

- quote -

I'm not aware that this changes anything. Wages and SE
income have never been netted for anything other than SE tax
computation to the best of my knowledge.

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

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In reviewing 2004-5 tax law changes, I see Briggs TC Summary
Opinion 2004-22. The Tax Court concluded that an employed
dependent individual's loss from self-employment did not
reduce her "earned income" for standard deduction purposes.
Because she had sufficient wages ($4275), she was entitled
to the full single-filer standard deduction allowed for a
dependent with earned income. Her self-employment loss
($3,703) was not netted against her wages to decrease the
standard deduction she could claim.

Could this opinion have other ramifications? For example,
what if this individual had wanted to contribute to an IRA?
Netting her self-employment loss against her wages would
have allowed a 500+ IRA deduction but if the self-employment
loss wasn't taken into consideration, she could have
contributed the full $3,000. Comments?

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