If you’re a newly established or recently acquired business, or a business that took several years to become profitable, now may be the time to put more money into employee benefit plans like a qualified retirement plan. Your business may be entitled to a tax credit that would reduce your business’s 2019 tax bill for plan start-up costs. This tax credit reduces the amount of taxes you may owe on a dollar-for-dollar basis.
The credit is 50% of your ordinary and necessary eligible startup costs up to a maximum of $500 per year.
The credit for starting a retirement plan is available for a 401(k), Simplified Employee Pension (SEP), Savings Incentive Match Plan for Employees (SIMPLE) or other qualified plans.
You may claim the credit for ordinary and necessary costs to set up and administer the plan and educate your employees about the plan.
Your business qualifies to claim this credit if:
- You had 100 or fewer employees who received at least $5,000 in compensation from you for the preceding year
- You had at least one plan participant who was a non-highly compensated employee
- In the 3 tax years before the first year you’re eligible for the credit, your 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
If you qualify, you may claim this credit using Form 8881, Credit for Small Employer Pension Plan Startup Costs.
You can claim the credit for each of the first 3 years of the plan and may choose to start claiming the credit in the tax year before the tax year in which the plan becomes effective.
The credit is part of the general business credit and you may carry it back or forward to other tax years if you can’t use it in the current year. However, you can’t carry it back to a tax year beginning before January 1, 2002.
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.