This article applies primarily to ABP client service partners who are accountants and financial advisors. Do you have clients who don't currently sponsor a tax-qualified retirement plan but contemplate doing so? There is a seldom-used federal tax credit that may help those businesses recover all or a portion of plan start-up costs and other administrative expenses.
Eligible Plans: The start-up plans tax credit is available to businesses that establish a new SEP, SIMPLE IRA, 401(k), pension, or other qualified plan.
Qualifications: The plan sponsor firm must (a) have employed fewer than 100 employees who earned at least $5,000 in the prior year, and (b) had at least one participant who is classified as non-highly-compensated. Further, the credit is not available if, in the preceding 3 years, substantially the same employees were covered by a retirement plan of the employer (or an affiliate) to which contributions were made or benefits accrued.
Credit Amount: The tax credit is 50% of the ordinary and necessary expenses associated with starting up the plan, up to a maximum of $500 per year.
Qualified Startup Costs: Under Code Section 45E, startup costs are defined to include expenses paid or incurred with respect to establishing or administering an Eligible Plan. This includes expenses related to the education of participants.
Duration: Although this is called a "start-up" plan tax credit, the credit can be claimed for costs incurred in the first 3 years of plan operation, including costs incurred in the year before the plan became effective.
No Deduction Allowed: Expenses for which the tax credit are claimed cannot also be taken as a business tax deduction, but the credit is almost always a better deal.
Money is probably being left on the table if you have clients who satisfy the above conditions but fail to take the start-up plan tax credit when their business tax returns are filed. It may be possible to take the tax credit on the business tax return for 2016 even if the plan didn't become effective until 2017. Please contact Wes Stohler if you have questions or otherwise need help firstname.lastname@example.org.