As a business owner you’re always trying to find ways to reduce cost and save money anywhere possible, right? Well, if your company or organization sponsors a SEP/SIMPLE IRA, 401(k), 403(b) or Defined Benefit Plan, there are several federal tax deductions and credits available to you. Take advantage of these tax breaks and credits now as they provide benefits not only to your company, but also to the owners/investors and employees who are participating in your company sponsored retirement plan as well. That’s right, you can save money while being an awesome employer to your employees!
1) IRS tax credit for retirement plan startup costs
You may be able to claim a tax credit, up to $500 per year for 3 years, for part of the ordinary and necessary costs of starting a 401(k), 403(b) or other qualified retirement plan. This tax credit, called the Credit for Small Employer Pension Plan Startup Costs, is part of the general business credit and can be carried back or forward to other tax years if it cannot be used in the current year. The credit equals 50% of the cost to set up and administer the plan as well as educate employees about the plan. You can choose to start claiming the credit in the tax year before the tax year in which the plan becomes effective. There are a few exceptions to this credit, so make sure to seek professional guidance from a Plan Administrator (like Leading Retirement Solutions) to ensure qualification for this credit.
To claim this tax credit
– Make sure the accountant for your organizations is aware that you have a retirement plan in place.
– Complete and submit to the Internal Revenue Service (IRS) Form 8881, to report startup costs incurred in establishing or administering a company sponsored retirement plan.
2) IRS tax credit for retirement savings contributions
Retirement plan participants (including self-employed individuals) who make contributions to a company retirement plan may qualify for the retirement savings contribution credit. Eligibility for this tax credit, called the Saver’s Credit or Credit for Qualified Retirement Savings Contributions, is dependent on your taxable income for the year. The maximum contribution eligible for the credit is $2,000.
To claim this tax credit
– Complete and submit to the Internal Revenue Service (IRS) Form 8880, to report contributions and claim the tax credit.
– To see if you qualify: https://www.irs.gov/pub/irs-pdf/f8880.pdf
3) Tax deduction for companies and organizations that make contributions to a retirement plan
Companies and organizations can reduce their taxable revenue by making contributions to a retirement plan. For most of you this is a no brainer, but if you’re new the retirement plan biz then how it goes is if your company makes a company contribution like a Matching or Profit Share Contribution, the contributions generally reduce the company’s taxable revenue (i.e. saves you money!) by the total amount of contribution(s) made to the Retirement Plan.
What’s more interesting is that business owners are oftentimes surprised to learn that a larger portion of a company contribution can be allocated to owners/family members/investors retirement plan account(s), again providing you with significant savings from Uncle Sam’s hungry pockets. Ask your Retirement Plan Administrator, or you can contact Leading Retirement Solutions, to calculate a contribution allocation based on your company ownership and your workforce.
4) Tax deduction for business owners, contributing to a retirement plan
Company owners can reduce their own taxable income by making contributions to a retirement plan. Company owners/investors/family members may contribute up to $18,000 annually (+$6,000 if age 50 and older). It should also be noted that amounts are generally adjusted upward each year as well.
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) Tax free distributions of Roth contributions and earnings
Company owners may contribute, as Roth/post tax contributions, up to $18,000 annually to the Plan (+$6,000 if age 50 and older). Again, these amounts are generally adjusted upward each year.
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! Your retirement plan can be amended to allow the conversion of your existing contributions into Roth monies so that any future earnings will be tax free!
Business Tip: Your retirement plan generally offers you more tax and savings benefits than you are aware of or are utilizing. Take the opportunity with Leading Retirement Solutions to evaluate your plan for additional benefits that you can take advantage of.
Click here to read about the new federal tax credit available to small businesses (https://blog.leadingretirement.com/2017/04/07/new-tax-credit-for-small-businesses/)