Davis, a sole proprietor with no employees, has a Keogh
profit-sharing plan to which he may contribute 15% of his annual
earned income. For this purpose, “earned income” is defined as
net self-employment earnings reduced by the

(d) The requirement is to determine the definition of
“earned income” for purposes of computing the annual contribution
to a Keogh profit-sharing plan by Davis, a sole proprietor. A
self-employed individual may contribute to a qualified retirement
plan called a Keogh plan. For 2013, the maximum contribution
to a Keogh profit-sharing plan is the lesser of $51,000 or 25% of
earned income. For this purpose, “earned income” is defined as
net earnings from self-employment (i.e., business gross income
minus allowable business deductions) reduced by the deduction
for one-half of the self-employment tax, and the deductible
Keogh contribution itself.