Starting a small business comes with many advantages to get off the ground, including access to certain deductions and tax credits that may not be available to larger businesses or organizations. The Retirement Plan Startup Cost Tax Credit allows qualified small businesses to claim up to $5,000, for 3 years, of the ordinary & necessary costs of starting SEP, SIMPLE IRAs, or other qualified retirement plans for their employees.
Qualified Employers
In order to qualify as an employer, your business must meet the following criteria:
- Retain 100 or fewer employees that have received at least $5,000 in compensation from the preceding year.
- Had at least one plan participant who was a non-highly compensated employee (NHCE).
- In the 3 years prior to eligibility, the employees weren’t substantially the same employees who received contributions or accrued benefits in another plan sponsored by the employer or a member of a controlled group that includes the employer.
Taking Credit
The Retirement Plan Startup Cost Tax credit is claimed by completing Form 8881 and submitting with the business tax return. The credit is worth 50% of your eligible startup costs up to the greater of:
- $500 OR
- The lesser of
- $250 multiplied by each non-highly compensated employee eligible to participate in the plan OR
- $5,000
The credit can be claimed for all ordinary & necessary costs to set up and administer the plan and to educate your employees about the plan. The first 3 years the plan goes into effect are eligible for the credit and your business may choose to start claiming the credit in a tax year prior to when the plan becomes effective. However, you cannot deduct startup costs and claim the credit for the same expenses.
Setting up a retirement savings plan for employees can help budding businesses retain their employees over the long haul. Small business owners already have enough on their plate in getting their new business started! Having an additional help with the tax and accounting concerns takes some of those stresses of the plates of owners. MiklosCPA has helped many small and emerging businesses with their tax and accounting needs and helping their owners meet their business dreams and goals. Interested in knowing how we can help your business? Give us a call. In the meantime, let’s stay in touch and follow our social media accounts for more “good to know” articles and tax tidbits.