| In order to encourage small businesses to establish and maintain retirement savings accounts for employees, Congress has enacted a law that gives a tax credit to eligible small businesses for some of the costs of establishing new eligible retirement plans. The credit equals half of the start-up costs incurred, not to exceed $500 in any tax year, and it may be claimed for qualified costs incurred in each of the three years beginning with the tax year in which the plan becomes effective.
An eligible small business is defined as one that has not employed more than 100 workers who received at least $5,000 of compensation from that employer in the preceding year. Under Internal Revenue Service rules, all members of a controlled group of corporations are considered one employer. In addition, all trades or businesses under common control are treated as a single employer.
If a small business is eligible, it is entitled to the credit for setting up a new qualified defined benefit, plan, a defined contribution plan (including a 401(k) plan), a savings incentive match plan for employees (SIMPLE), or a simplified employee pension plan (SEP). In order to qualify for this credit, any plan established must cover at least one employee who is not a highly compensated employee.
Costs that qualify for the credit are any ordinary and necessary expenses incurred to establish or administer an eligible plan or to educate employees about retirement planning. In order to avoid a double tax benefit, qualified costs are not deductible to the extent that they are effectively offset by the credit. However, the eligible small business is entitled to a deduction for any remaining qualified costs that are ordinary and necessary business expenses.
Copyright 2010 LexisNexis, a division of Reed Elsevier Inc. |