Plan Start-Up Tax Credit | Form 8881 DOES NOT Apply to: Solo 401k | Individual 401k | Solo K

Common misconception exists regarding the plan start-up credit which is only available to small employers. A small employer is defined as an employer that had 100 or fewer employees and who each received at least $5,000 of compensation from the employer for the preceding year. Therefore, since a Solo 401k | Individual 401k plan is for the self employed with no employees, it cannot claim the credit.

The rest of this blog posting explains the plan start-up credit but remember that it doesn’t apply to Solo 401k or Individual 401k.

Resulting from the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001, a qualified employer may take the tax credit for establishing a new qualified retirement plan.

Qualified start-up costs

Include any ordinary or necessary expenses incurred in connection with:

  • establishment of plan;
  • administration; or
  • educating employees about the plan

Determining the Credit and Form 8881

  • The credit equals 50% of start-up costs detailed above up to $500 per year for maximum of plan’s first 3 years.
  • Employer has option of applying 1st year credit to year of plan establishment or to year before.
  • To claim credit, qualified employer completes and attaches Form 8881, Credit for Small Employer Pension Plan Startup Costs, to its business tax return.
  • The credit is permitted as part of employer’s general business credit.
  • Employer may not claim a deduction for the start-up costs in addition to claiming the credit.
  • However, employer has option to elect not to claim the start-up credit at all.

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>