Mark Twain once said the difference between a taxidermist and a tax collector is the taxidermist takes only your skin.
Taxes are no laughing matter. Even a small tax credit can lighten the load.
Determine if you or your retirement plan clients are eligible for a $500 tax credit by reviewing the Q&A that follows.
Q: How do I identify if I or my clients are eligible?
A: To be eligible, a plan sponsor must have adopted a qualified retirement plan within the last 3 years.
Q: What else is required to qualify?
A:
- There must be at least one non highly compensated participant (a participant who owns less than 5% of the company or a participant who earned less than $110,000 during the prior year);
- The plan sponsor must not have maintained a retirement plan in the 3 years prior to establishment of this plan (this includes controlled groups and predecessor employer plans); and
- The plan must be a qualified employer plan such as a 401(k), Defined Benefit, SIMPLE, or SEP plan. See complete definition on Form 8881.
Q: How much can a plan sponsor claim?
A: 50% of the first $1,000 of set-up and administrative costs for each of the first 3 years of the plan's existence (a maximum credit of $500 per year). The remainder of these costs is also tax-deductible over and above the tax credit.
Q: How does a plan sponsor claim this credit?
A: Simple. Complete IRS Form 8881 - Credit for Small Employer Pension Plan Startup Costs.
Q: Does a plan sponsor have to apply the credit to this year?
A: No. This credit is part of the General Business Credit, which can be carried forward or backward to other tax years if it cannot be used in the current year. See your tax advisor for details.
Q: Great! One more question - are there any credits for the participants of a plan?
A: Yes! The Retirement Savings Contribution Credit for Plan Participants. Participants will need to complete IRS Form 8880 - Credit for Qualified Savings Contributions.
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