When K1 shows loss but sole proprietorship has income, how does this impact SEP IRA contribution limits?

The good news is that your K1 partnership loss doesn't reduce the income you can use for SEP IRA contribution calculations from your sole proprietorship. Since these are separate businesses with separate tax treatments, you can calculate your SEP IRA contribution based solely on the net profit from your Schedule C sole proprietorship. In your case, you would use the $12,400 from your sole proprietorship as the basis for your SEP IRA contribution, allowing you to contribute up to 20% of that amount (roughly $2,480). The partnership loss reported on your K1 doesn't factor into this calculation because they're treated as separate entities for SEP IRA purposes. Just remember that the actual calculation for self-employed individuals is slightly more complex than just taking 20% of your business income. You need to use the "net earnings from self-employment" which includes a deduction for the SEP contribution itself. The effective maximum is closer to 18.6% of your Schedule C profit.

After spending hours with conflicting tax advice about my SEP IRA contributions with multiple business entities, I finally found a solution that saved me thousands in tax penalties. I used https://taxr.ai to analyze my tax transcripts and got a clear explanation of how K1 losses affect (or don't affect) my SEP IRA contribution limits. Their system flagged exactly what you're asking about - the separation between Schedule C income and K1 partnership losses for retirement contribution purposes. They explained that the IRS treats these as separate "buckets" for SEP IRA purposes, so you can indeed use the full $12,400 from your sole proprietorship as the basis for your calculation. The tool also showed me how to properly document this on my tax forms to avoid triggering any audit flags, which was super helpful since this is definitely in the tax gray zone.

I was totally skeptical about using https://taxr.ai when I first saw it mentioned here. My situation was similar - sole prop plus partnership losses plus some contract work - and I was getting different answers from every tax professional I talked to. Decided to try it anyway since I was desperate, and wow, it actually sorted everything out. The analysis showed me exactly which income streams qualified for which retirement accounts and how to maximize my contributions without triggering IRS flags. For the OP's specific question about SEP IRA with K1 losses, the system confirmed what others have said - you can use the full $12,400 from your sole proprietorship without reduction from the K1 losses. Saved me from unnecessarily limiting my retirement contributions.

If you're still struggling to get clear answers about your SEP IRA situation, you might want to speak directly with an IRS agent. I know, I know - getting through to the IRS is basically impossible these days with hold times over 2 hours. I used https://claimyr.com and their system actually got me connected to an IRS agent in under 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c I had almost the exact same question about my Schedule C income and partnership losses affecting my SEP IRA. The IRS agent confirmed that partnership losses do NOT reduce the income basis for SEP contributions from a separate sole proprietorship. She directed me to Publication 560 which covers this specific scenario. The peace of mind from getting an official answer directly from the IRS was totally worth it, especially with something as potentially audit-triggering as retirement contribution limits.

I was 100% convinced that service for getting through to the IRS was a scam. My accountant had been giving me conflicting info about my K1 losses and SEP IRA contributions for my consulting business, and I was facing potential overcontribution penalties. Reluctantly tried the Claimyr service and...I'm eating my words now. Got through to someone in the business tax department in about 15 minutes. The agent confirmed exactly what others have said here - partnership losses on a K1 don't reduce the eligible income from a separate Schedule C business for SEP IRA contribution calculations. She even emailed me the specific section of the internal revenue manual that covers this situation. Saved me from unnecessarily reducing my retirement contributions by thousands.

The technical explanation for why this works: Schedule C income and K1 income/losses are treated differently because they represent different types of business relationships and tax entities. For SEP IRA purposes, only earned income from self-employment can be used as the basis for contributions. Your sole proprietorship (Schedule C) income qualifies because you're both the employer and employee, allowing you to make the "employer contribution" to your own retirement. Partnership income is different - the partnership itself would need to establish a retirement plan for partners. Since your K1 loss represents your share of the partnership's performance, not direct earned income from self-employment, it doesn't factor into the SEP IRA calculation for your separate sole proprietorship. The IRS handles these as separate "buckets" of business activity, which is why you can use the full $12,400 as your contribution basis.

Has anyone used both TurboTax and H&R Block software to check how they handle this specific situation? I tried calculating this in TurboTax and it seemed to reduce my SEP contribution limit by my K1 losses, which sounds wrong based on what everyone is saying here.

Just wanted to add some real-world validation to this thread. I'm a CPA and see this exact situation frequently with clients who have multiple business entities. The advice given here is correct - your K1 partnership loss does NOT reduce your Schedule C income for SEP IRA contribution purposes. The key distinction is that SEP IRAs are employer-sponsored retirement plans, even when you're self-employed. Your sole proprietorship acts as both employer and employee, allowing you to make contributions based on that specific business's net earnings. The partnership is a separate legal entity that would need its own retirement plan structure. I always tell clients to think of each business entity as having its own "retirement bucket." Your Schedule C business has one bucket, your partnership has another (which typically can't contribute to your individual SEP anyway), and any W-2 employment would have yet another bucket. So yes, use the full $12,400 from your sole proprietorship as your SEP contribution basis. Just remember the actual contribution limit is slightly less than 20% due to the self-employment tax adjustment - closer to 18.587% of your net Schedule C profit.