1) Credit for startup costs
You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a 401(k), 403(b) or other qualified retirement plan. To take the credit, use Form 8881, Credit for Small Employer Pension Plan Startup Costs.
The credit equals 50% of the cost to set up and administer the plan and educate employees about the plan, up to a maximum of $500 per year for each of the first 3 years of the plan. You can choose to start claiming the credit in the tax year before the tax year in which the plan becomes effective. You must have had 100 or fewer employees who received at least $5,000 in compensation from you for the preceding year. At least one participant must be a non-highly compensated employee. The employees generally cannot be substantially the same employees for whom contributions were made or benefits accrued under a plan of any of the following employers in the 3-tax-year period immediately before the first year to which the credit applies: 1) You; 2) A member of a controlled group that includes you; or 3) A predecessor of (1) or (2).
The credit is part of the general business credit, which can be carried back or forward to other tax years if it cannot be used in the current year. However, the part of the general business credit attributable to the small employer pension plan startup cost credit cannot be carried back to a tax year beginning before January 1, 2002. You cannot deduct the part of the startup costs equal to the credit claimed for a tax year, but you can choose not to claim the allowable credit for a tax year.
2) Retirement savings contributions credit
Retirement plan participants (including self-employed individuals) who make contributions to their plan may qualify for the retirement savings contribution credit. The maximum contribution eligible for the credit is $2,000. Form 8880, Credit for Qualified Retirement Savings Contributions, and the instructions explain how to figure the amount of the credit.
3) Employer contributions reduce company’s taxable revenue
If your Company makes an Employer contribution, the contributions, up to 25% of the gross compensation, generally reduces the company’s taxable revenue by the total amount of contribution made to the Plan.
4) Company owners reduce their own taxable income
Company owners may contribute up to $18,000 (+$6,000 if age 50 and older), annually (amounts are generally adjusted upward each year). Company owners may contribute their earned income, which can include W-2 compensation, K-1 draws, etc., to their company retirement plan each year, thereby reducing the owner’s personal, taxable compensation.
5) Roth contributions made to a 401(k) or 403(b) Plan
Company owners may contribute, as Roth/post tax contributions, up to $18,000 (+$6,000 if age 50 and older), annually (amounts are generally adjusted upward each year) to the Plan. The Roth contribution tax gratification comes down the road, when you start taking the Roth contributions back out of the Plan (via distribution or otherwise) any and all earnings generated by the Roth dollars come out tax-free!
The Internal Revenue Service (IRS) also has additional information that will be useful. Your Certified Public Accountant (CPA) can also assist you with claiming these available tax credits on your company tax returns.
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