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Retirement Plans Startup Costs Tax Credit

You may be able to claim a tax credit for some of the ordinary and necessary costs of starting a SEP, SIMPLE IRA or qualified plan. A tax credit reduces the amount of taxes you may owe on a dollar-for-dollar basis.

If you qualify, you may claim the credit using Form 8881, Credit for Small Employer Pension Plan Startup Costs.

Eligible employers
You qualify to claim this credit if:

  • You had 100 or fewer employees who received at least $5,000 in compensation from you for the preceding year;
  • You had at least one plan participant who was a non-highly compensated employee; and
  • In the 3 tax years before the first year you’re eligible for the credit, your employees weren’t substantially the same employees who received contributions or accrued benefits in another plan sponsored by you, a member of a controlled group that includes you, or a predecessor of either.

Amount of the credit
The credit is 50% of your ordinary and necessary eligible startup costs up to a maximum of $500 per year.

Eligible startup costs
You may claim the credit for ordinary and necessary costs to:

  • Set up and administer the plan, and
  • Educate your employees about the plan.

Eligible tax years
You can claim the credit for each of the first 3 years of the plan and may choose to start claiming the credit in the tax year before the tax year in which the plan becomes effective.

The credit is part of the general business credit and you may carry it back or forward to other tax years if you can’t use it in the current year. However, you can’t carry it back to a tax year beginning before January 1, 2002.

No deduction allowed
You can’t both deduct the startup costs and claim the credit for the same expenses. You aren’t required to claim the allowable credit.

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