Small Business Receives a Tax Credit for 401k Startup Costs – why you should establish a new 401K today!
Startup costs have always been a major hurdle to small businesses who want to start a 401k plan, but a provision of The Economic Growth and Tax Relief and Reconciliation Act (EGTRRA) provides a tax credit for employers to offset the startup cost and the cost of educating employees about the new plan.
The 401K tax credit equals 50% of the costs to set up and administer the plan and educate employees about the plan. The maximum credit is $500 per year for each of the first three years of the plan. For plans established after 2002, the credit can be claimed in the tax year before the tax year the plan becomes effective. The credit 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.
Small businesses have traditionally been at a disadvantage compared to large corporations in providing a 401k for their employees. However, thanks to the small business tax credit we just discussed that helps defray the cost to establish a 401K, the playing field is leveling out.
Why Small Businesses Should Establish a New 401(k) Plan
Besides the tax credit of $500 for the first three years of the plan, here are several additional reasons that now is an excellent time to start your small business 401(k) plan.
A 401K plan helps you recruit better qualified employees. A 401K plan is an attractive part of an employment package to help attract new employees.
A 401K offers you the employer a tax savings. If you offer a company match to the 401(k) plan, all of the matching contributions (up to some limits) are tax deductible. Your employees will be happy because you are helping them save for retirement, you’ll be happy because you saved money on your tax return.
A 401K helps retain valuable employees. Delayed vesting of the employer match is known to influence employee decisions to hang in there for a year or two longer in order to retain the employer match portion. A 401k helps the owner save for retirement too.
Owners are eligible to participate in the 401k plan as well. Plan participants can contribute up to $18,000 (24,000 over age 50) of their income on a pre-tax basis each year. That means that as owner, you receive a tax savings for offering the plan and providing matching contributions, and you receive another tax savings for participating in the plan. For example, an owner in the 25% tax bracket who made the maximum contribution would save $4,500 in taxes!
Small Business Owners should realize 401(k) plans offer tax advantages including tax credits and deductions for their business and individual tax deductions for their own individual account as well. A small Business 401(k) plan is one of the best ways to save on taxes while saving for your retirement.
To schedule an appointment to implement this strategy and others within the context of your unique tax situation, Contact Brown CPA Group, Ltd., at (847) 509-4100.
About the author: Ken Smith is an Enrolled Agent and Senior Staff Accountant with Brown CPA Group, Ltd. We know that success means different things to different people. While a business owner strives to maximize profits, increase efficiency and plan for succession; an individual client is more concerned with tax planning, wealth management, retirement and estate planning. At Brown CPA, we work with you on the total picture. Together, we succeed.
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