Retirement Plans: Startup Costs Tax Credit

Eligible employers may be able to claim a tax credit of up to $5,000, for three years, for the ordinary and necessary costs of starting a SEP, SIMPLE IRA or qualified plan (like a 401(k) plan.) A tax credit reduces the amount of taxes you may owe on a dollar-for-dollar basis.

Eligible Employers

  • Had 100 or fewer employees who received at least $5,000 in compensation from you for the preceding year.
  • Had at least one plan participant who was a non-highly compensated employee.
  • In the three tax years before the first year of credit eligibility, employees weren’t substantially the same employees who received contributions or accrued benefits in another plan sponsored by you, a member of a controlled group that includes you, or a predecessor of either.

Amount of the credit

The credit is 50% of your eligible startup costs, up to the greater of:
  • $500; or
  • The lesser of:
    • Ho $250 multiplied by the number of NHCEs who are eligible to participate in the plan, or
    • $5,000.

Eligible startup costs

  • Set up and administration costs.
  • Costs to educate employees about the plan.

No double dipping

You can’t both deduct the startup costs and claim the credit for the same expenses. You aren’t required to claim the allowable credit.

Auto-enrollment tax credit

An eligible employer that adds an auto-enrollment feature to their plan can claim a tax credit of $500 per year for a 3-year taxable period beginning with the first taxable year the employer includes the auto-enrollment feature.

Be sure to consult with your tax professional to analyze your specific tax situation. At Taxperts, we can assess your small business structure and suggest ways to increase your savings. Check out our website, Facebook page, or LinkedIn page to learn more.

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