Tax Day is approaching quickly! Have you filed your business taxes yet? If not, then now is the time to get them filed. One thing to remember as a new business or a company just starting to offer retirement plans is the available tax credit for retirement plan start-up costs. Employers can claim up to $5,000 in tax credits for the first three years after implementing qualifying retirement plans for the necessary and ordinary costs of implementation. Let’s look at the requirements for the tax credit for retirement plan start-up costs.
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Eligibility Requirements for Employers
Employers can qualify to claim the retirement start-up costs credit if:
- The company had 100 or fewer employees who received at least $5,000 in compensation for the preceding year.
- The company had at least one plan participant who was a non-highly compensated employee.
- In the 3 tax years before the 1st year, the company is eligible for the credit, the employees weren’t substantially the same employees who received contributions or accrued benefits in another plan sponsored by the company, a member of a controlled group that includes the employer, or a predecessor of either.
Amount of Credit
The credit is 50% of your eligible costs, up to $250 times the number of eligible NHCEs (with a minimum of $500) up to a maximum of $5,000.
Eligible Start-Up Costs
The credit may be claimed for ordinary and necessary costs to:
- Set up and administer the plan.
- Educate the employees about the plan.
Eligible Plans
Only a qualified plan (like a 401(k) plan), SEP, or SIMPLE IRA qualify for the tax credit. While other plans, such as state-run plans and established group plans, may not qualify for the tax credit, remember to consider long-term costs as well.
For many small businesses, the start-up costs for employer-sponsored plans are often cited as a reason why companies shy away from establishing a plan, but the tax credit for retirement plan start-up costs can help alleviate this concern. For the tax forms and additional information on the tax credit visit the IRS’s website. If you are looking for additional information on the different types of retirement plans and how to start implementing them, contact California Pensions today.
