Daniel from BookkeepingForPainters.com explains the retirement plan startup cost tax credit for small painting businesses. You can claim 50% of setup costs, capped at $500, for three years if you have fewer than 100 employees and no prior retirement plan. A walkthrough with Bob's Painting Company shows how the credit combines with tax deductions to create real savings.
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Hi, this is Daniel from BookkeepingForPainters.com, and this video is about the retirement plan startup cost tax credit. So in this video, I'm basically going to go over how you can be eligible for this tax credit. I'm going to go over the actual benefits of taking this tax credit, and then I'm going to review an example. So first of all, eligibility. If you want to start up a retirement plan for your painting business, You basically need to start up either a SEP, a simple IRA, or a qualified plan, which is a 401(k) would be an example of a qualified plan. So first of all, you got to start up one of those to claim this credit. Your business has to have fewer than 100 employees. You have to have at least one plan participant who is not an owner or not a highly compensated individual. So basically someone that doesn't own more than 5% of the company. And you cannot have had a retirement plan in your business in the past 3 years. So if you meet those requirements, you can claim this retirement plan startup cost tax credit. All right, next is the benefit. So the actual benefits— what are the benefits of this tax credit? You can basically claim a tax credit for 50% of the ordinary and necessary startup costs with a $500 cap. So if you have $2,000 of costs to start up the plan, 50% of that is $1,000, you can only claim the first $500 of that. So now to define what startup costs are, they have to be ordinary and necessary. So examples of this, administrative costs, so a lot of the times financial institutions can set up a plan, a 401(k) for your company and they'll charge you $100 a month for administrative costs. So those would be part of that. And also you have— maybe you want to educate your employees about the retirement plan, so you bring everyone in and you pay them a wage to instruct them about the benefits of the retirement plan for an hour or so. So those wages that you paid out would be a unnecessary startup costs that would qualify for a portion of that, would qualify you for that tax credit. Number 2, you can claim this tax credit for the first 3 years of implementation. After that, you can't claim this tax credit anymore. And then, as a note at the bottom, so you have your tax credit for the startup costs, ordinary and necessary startup costs, In addition to that, you can actually— let's say you have a 401(k) that you started in your business and you want to do some matching, you want to match contributions for your employees. Those matching contributions are, in general, are tax deductible as well. So that's something to keep in mind that has an impact on your taxes. So let's run through an example really quick. So let's take Bob's Painting Company. He has 20 employees. and Bob is in the 25% tax bracket. So of the 20 employees, 10 of them elect to participate in the retirement plan that Bob offers. So of the 10 employees, the average salary and contribution rate is $30,000, and the average contribution rate is 4%. Bob decides that he wants to match up to 4%. So this costs him $12,000 for the whole year. That $12,000 is tax deductible. In addition to that, Bob contributes to the retirement 401(k) as well, and he does— he maxes out at $18,000. So this actually reduces his tax liability since he's in the 25% tax bracket. $4,500 of that— $4,500 he basically saved $4,500 on his taxes. And now for the plan administration costs, $1,300. Now, like I said before, 50% of that can be applied to a tax credit. So 50% of $1,300 is $650. However, there's a $500 cap, so $500 would be the tax credit for the startup costs. For number 2, the cost before the tax savings for this starting and maintaining this retirement plan, this includes the administrative cost, the matching contributions for the retirement plan, that totals out to $13,300. Now the actual cost after the tax implications and the tax savings the tax savings to include the deductions for the matching contributions, the reduction of tax liability due to Bob's contributions, and the tax credit itself, those reduce the actual cost down by $18,000 to a total of $5,300. So you can see there's substantial savings for Bob in this example, obviously. Your situation is different, so I recommend that you consult a tax advisor before going into this type of endeavor, but there is a possibility for substantial savings using this tax credit. So, I appreciate your time. Hopefully this video was helpful. Next steps, if you'd like some more bookkeeping and tax tips, Make sure you go to bookkeepingforpainters.com/free-ebook. Thanks.
