If you are a small business owner who recently established a retirement plan for your business. you may be eligible to receive a nonrefundable tax credit for expenses you incurred to implement the plan. This is in addition to any tax deduction you may receive for plan contributions. The tax credit may be claimed for a maximum period of three years. Here is an overview of the rules that apply to claiming the tax credit.
The tax credit is available to employers with no more than 100 employees who earned at least $5,000 in the previous year. For instance, assume an employer established a retirement plan for year 2013. The employer is eligible for the credit if, in 2012, the business had no more than 100 employees who received at least $5,000 in compensation. (An employer with more than 100 employees may still be eligible if no more than 100 of the employees earned at least $5,000.)
Should an employer meet this requirement one year but fail to do so in a subsequent year, the employer is allowed a two-year grace period to claim the credit. For example, assume ABC Inc. met the requirements in 2011, but exceeded the 100-employee limitation in 2012 and 2013. ABC Inc. is still eligible to claim the
credit for year 2012 and 2013 because of the two-year grace period.
Employer Aggregation Rules Apply
The employer aggregation rules apply to the tax credit. This means that if more than one business is under common control, they may be treated as one for plan purposes. An employer who owns more than one business should consult with a tax attorney to determine whether he or she is subject to the employer aggregation rules.
Eligible Expenses and Applicability
Expenses eligible for the tax credit include those defined as the plan's start-up costs, which are ordinary or necessary for the establishment of the plan. These include expenses incurred to establish the plan, administrative fees and costs incurred to educate employees about the plan.
The credit is limited to 50% of the first $1,000 in expenses; therefore, the credit cannot exceed $500. The credit is nonrefundable; therefore, the employer may not generate an income tax refund for the credit.
Be sure to consult your tax professional about this and other plan benefits, such as the increased contribution and deduction limits and exceptions that apply to small business owners. These benefits can be added incentives for establishing a plan for your business, which, in turn, will help to attract high-quality employees and boost employee morale.
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