As we near the end of the year, many business owners rush to establish retirement plans to capture calendar fiscal year tax deductions. If you’re one of those small business owners, you may also be eligible to receive a tax credit for expenses you incurred to implement your plan.
What’s the difference between a tax deduction and a tax credit? A tax deduction is something that your business can use to reduce the amount of taxable income. A tax credit can be used to reduce how much tax is owed.
But as with all things taxes, certain requirements must be met. Here is a brief summary:
- The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) added a tax credit of up to 50% of the first $1,000 in retirement plan start up expenses for the first three years of a plan.
- An employer is an eligible employer if, during the preceding year, there were 100 or fewer employees who received at least $5,000 of compensation.
- The plan must cover at least one Non-Highly Compensated Employee.
- The employer must not have established or maintained any employer plan during the three tax-year period immediately preceding the first tax year in which the new plan is effective.
- Eligible plans include qualified plans such as 401(k) plans, profit sharing plans, traditional pension plans, cash balance pension plans, and employee stock ownership plans, SEP IRAs, and SIMPLE IRAs.
- Eligible expenses include those incurred to establish the plan, administrative fees and costs incurred to educate employees about the plan.
- To claim the credit, an employer must file IRS Form 8881 – Credit for Small Employer Pension Plan Start-Up Costs.
For additional information on the retirement plan tax credit, here is a link to our FAQs. Be sure to talk to your tax adviser to determine whether you can take advantage of it.