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5 Great Tax Breaks for Business Owners with a Retirement Plan

June 13, 2018

If you’re a business owner just trying to save a little extra cash or a financial advisor hoping to help your clients do the same, saving and investing more for retirement, then we have some insights for you on 5 outstanding tax breaks that will help you pay less in taxes and keep more money in your pocket.

TAX BREAK #1: Credit for retirement plan startup costs.

Did you recently implement a retirement plan for your business or are you planning to? You can likely claim a tax credit for part of the ordinary and necessary costs of starting a 401(k), 403(b) or other qualified retirement plan. The credit equals 50% of the cost to set up and administer the plan as well as educate employees about the plan, up to a maximum of $500 per year for each of the first 3 years of the plan.

Even if you haven’t started a new retirement plan yet but plan to, you can choose to start claiming the credit in the tax year before the year in which the plan becomes effective!

To claim this credit:

  • Call Leading Retirement Solutions. We will determine what credit(s) you are eligible for.
  • 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).

This type of tax credit is separate from available tax deductions and 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, but not before January 1, 2002, that’s the cutoff.

Make sure you let your bookkeeper and/or Certified Public Accounting (CPA) know to complete Form 8881, claiming the available credit for Small Employer Pension Plan Startup Costs.

TAX BREAK #2: Retirement savings contributions credit (Savers Credit)

Retirement plan participants (including self-employed individuals or solopreneurs) who make contributions to their plan may qualify for the retirement savings contribution credit. The maximum contribution eligible for the credit is $2,000 ($4,000 if filing jointly) and is offered to those individuals and households that earn a relatively low income yet still contribute to a retirement plan. Some can even get as much as 50% of their contributions back. That’s free money!

To claim this credit:

  • You must be 18 or older;
  • Not a full-time student; and
  • Not claimed as a dependent on another person’s return.
  • Your Adjusted Gross Income (AGI) must not exceed a certain amount if filing jointly, head of household or other and will also determine the credit percentage of your contribution. See table below.


Use Form 8880, Credit for Qualified Retirement Savings Contributions

TAX BREAK #3: Employer contributions reduce company’s taxable revenue.

There are several reasons why employers may want to make matching or even profit share contributions to their own retirement accounts. The most common reason a business owner will decide to make a matching and/or profit share contribution to the retirement plan is for tax reduction and savings opportunities. One of the most common misconceptions about company contributions is that all employees, including company owners, must receive equal amounts. NOT TRUE and we can, almost always, get a greater contribution percentage and tax reduction benefit to the owners of a company.

A decision to make a company contribution to a retirement plan can also be part of a larger talent acquisition/retention strategy or maybe you just want to add further value for your current employees because, hey, you also care about their future.

One thing is certain, company made contributions reduce a company’s taxable revenue. So not only are you adding a valuable benefit for your employees, but also you will be effectively lessening your tax burden.

TAX BREAK #4: Company owners reduce their own taxable income.

This one may be a little obvious, but often is overlooked or not understood by business owners as they rush to put more money back into their business. Nonetheless, business 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 their own personal, taxable compensation.

As of 2018, company owners may contribute up to $18,500 (+$6,000 if age 50 and older, among other allowable contributions that can total up to $61,000) annually to a 401(k) Plan. However, 2019 may be different as the IRS is known to increase the contribution amounts a little every year.

TAX BREAK #5: Roth contributions made to a 401(k) or 403(b) Plan, result in tax free earnings.

Company owners may contribute, as Roth/post tax contributions, up to $18,500 (+$6,000 if age 50 and older, and a total allowable contribution up to $61,000) annually to the Plan. The Roth contribution tax gratification isn’t immediate but certainly comes down the road. When you start taking the Roth contributions back out of the Plan (via distribution or otherwise) all earnings generated by the Roth dollars come out tax FREE!

For more tips and information regarding retirement plans, contact us.

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