How to Claim a Tax Credit for Retirement Plan Expenses

Small businesses that sponsor a retirement plan are eligible for a special tax credit. They may claim a tax credit for a portion of their retirement plan startup expenses for the first three years of the retirement plan’s existence. The tax credit was designed as an incentive for small businesses to offer a retirement savings plan, allowing their employees to save for retirement.

Ways to Claim a Tax Credit for Retirement Plan Expenses

Determine if your small business is eligible to receive the tax credit for your retirement plan expenses. According to the IRS, to be eligible, small business must have less than 100 employees earning a minimum of $5,000.

Obtain a copy of IRS Form 8881, Credit for Small Employer Pension Plan Startup Costs, from the IRS website or from your tax adviser. IRS Form 8881 is used by businesses to claim a tax credit for startup expenses paid during the first three years of sponsoring a retirement plan.

Begin filling out IRS Form 8881 by writing your business name and identifying number at the top of the form.

Enter the amount of your retirement plan startup expenses paid into line 1. It’s important to remember that the IRS limits business owners to a maximum of $1,000.

Divide the number entered in line 1 by half and enter that amount into line 2. For eligible employers, the tax credit is equal to 50 percent of the startup expense paid that year.

Input into line 3 any additional credit for eligible pension plans’ startup expenses from either S corporations or partnerships.

Add the amounts in line 2 and line 3 together and write that amount into line 4.

Enter into line 5 the smaller value of either $500 or the amount in line 4. The tax credit is set at a maximum of $500 for the first three years of the retirement plan’s existence. Credits aren’t available beyond year 3 of the retirement plan.

Report the number in line 5 on your business tax return. Depending on your business entity, you must report it in different places. For an S corporation or a partnership, report the amount in line 5 on your Schedule K. For other business entities, report the amount in line 5 on line 1m of Form 3800.

Attach Form 8881 to your business tax return to be filed.