The Small Business Retirement Plan Tax Credit

If you have recently started a small business retirement plan for your business, you may be eligible to receive a tax credit from the IRS. The government has put in place provisions for small businesses to get credit for starting a retirement plan. Here are the basics of the small business retirement plan tax credit and how it works.

Small Business Retirement Plan Tax Credit

Most business owners realize that they will get a tax deduction for contributing to their employee's retirement accounts. The small business retirement plan tax credit is a completely different issue. You can actually take advantage of both tax incentives. The small business retirement plan tax credit is a credit that you will receive to help reimburse you for the costs of starting a retirement plan for your business. Businesses can claim this credit for a maximum of three years when they start a retirement plan.


Not every business is eligible for this retirement plan tax credit. You have to be a small business according to the IRS in order to qualify. This means that you cannot have more than 100 employees that earned at least $5000 in income during the previous year. If you have more employees than this, this will not be an option for you. If you are barely over the limit, there is a two-year grace period for claiming this credit. For example, if you meet the requirements one year and do not meet them in the next, you have some time to use the credit.

You also have to have a type of retirement plan that is eligible for this program. Some of the accounts that you can have are a 401k, profit sharing plan, defined benefit plan, SEP IRA and a SIMPLE IRA.

In addition to these requirements, you also have to have at least one employee in the plan who is not considered highly paid. This means that someone who does not have more than 5 percent ownership in the company and makes less than $90,000 per year must be in the retirement plan. Otherwise, you will not be able to claim this credit.

Credit Amount

If you qualify for this credit, you will be able to receive up to $500 back. You can claim up to $1000 of expenses related to starting the retirement plan. The credit is good for 50 percent of whatever you claim in expenses.

Other Considerations

You should also know that aggregation rules will come into effect with this credit. For example, if you own more than one business and manage the businesses together, the number of employees for both businesses will count towards the 100-employee limit.

You should also realize that this credit is optional. You do not have to file for the credit unless you want to. Some business owners choose to factor these expenses in as ordinary business deductions instead of as a small business retirement plan tax credit.

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