Tax Advantages of Small Businesses

While you may not be thinking about your retirement now because it is still years away, you should never forget to make significant contributions to your retirement, especially when the government offers tax incentives for small businesses to set up retirement plans.

Topics Covered in This Article:

  • Simplified Employee Pension Plans (SEP)      
  • Qualified Plan (Keogh)           
  • Savings Incentive Match Plan for Employees (SIMPLE Plan)
  • Individual 401(k) Plan
  • Small Employer Pension Startup Credit

Small businesses have several options for retirement plans that can permit both employers and the employees to save money for retirement in a manner that is tax-efficient.

The business owner may decide to make contributions on the employee's behalf or for himself, which may be tax-deductible. The contributions may also grow tax-free unless distributions are taken out of the plan.

Simplified Employee Pension Plan (SEP) SEP avoids some of the complex issues that are associated with a qualified plan. The SEP contributions are kept in the IRA accounts of the beneficiaries. The limits on deductible contributions are $53,000 or 25% of the plan participant's compensation (for a maximum of $265,000). The SEP may be established or funded following the year's end.

Qualified Plan (Keogh). Keogh plans tend to have rules that are more complex. A mandatory contribution money purchase plan, or discretionary contribution profit sharing plan, or a combination of these two types of plans, may be included.

For 2015, the limits of deductible contributions are $53,000 or 25% of the participant's compensation (for a maximum of $265,000). Keogh plans have to be set up prior to the end of the year. However, plan contributions may be made after the end of the year.

Savings Incentive Match Plan for Employees (SIMPLE Plan). A SIMPLE Plan permits the business owner to take a deduction. The business's employees will, as a result, gain a salary deferral.

For 2015, the contribution limit is $12,500 (per employee or employer). For plan participants age 50 or older, an additional $3,000 catch-up contribution limit is set. The employer has the option to match the contribution at up to 3% of compensation or to make a nonelective contribution of 2% of compensation.

Individual 401(k) Plan. Individual 401(k) plans provide the perks of a traditional 401(k) plan but also have additional benefits for owners of small businesses. The business owner can contribute and deduct up to 25% of compensation.

The plan also permits an additional $18,000 of salary deferral, with a maximum of $53,000. For business owners that are age 50 or older, the maximum is $59,000. For employees, the maximum salary and contribution deferral is $18,000. An additional catch-up contribution of $6,000 is permitted for employees age 50 or older. Employers may match the employee contributions.

If you are interested in establishing a new qualified pension plan as a business owner, you may be eligible for a "small employer pension startup credit." The credit equals 50 percent of the expenses related to plan administration and retirement education. The expenses that are in excess of this credit are considered as business expenses for deduction purposes.

The tax year that has the effective date of the plan is considered as the first credit year. The owner of the business may decide to claim the preceding tax year as the first credit year.

Other expenses that may qualify for a "small employer pension startup credit" are costs incurred for the payroll system modification of the employer, consulting expenses, and the set-up expenses that are involved in setting up the investment vehicles.

If you need help with a retirement plan for your business or want to learn about the tax benefits that your business could be eligible for, give us a call at (956) 272-0115.