Jump to content
ATX Community
Sign in to follow this  
Edsel

Credit for Small Employer Pension Plan Startup Costs

Recommended Posts

[Salesmans Old Fish Stories] We've heard of these before - "Lease your car" for tax breaks, Buy my "Energy Star" product for tax credits, etc.  For the most part there is only an element of truth - enough to mislead the consumer.

I heard one today for the first time - I would like to present this to you for your comment, review, or clarification:

A large client is establishing a 401(k) plan next January.  The plan consists of an employee's deferred payroll deduction, an employer's match, and an administrative fee billed to the employer annually.  As far as I know this is typical.

The administrative fee is $2000 annually.  Agent for the custodian told my client there is a 25% tax credit associated with the $2000 fee, and they will get $500 back.

What???  For Real???   Have I missed something?  Comments please...

 

Edited by jklcpa
Appropriate, descriptive title. Former title in [text].

Share this post


Link to post
Share on other sites

Amazing.  Thank you Catherine.

One remaining question.  It appears if we take the credit on Form 8881, we cannot take the deduction.  We either get the deduction or the tax credit, but not both. 

Administrative Fee is $2000.  Maximum credit is $500.  Taxpayer is in 35% tax bracket.  Which of the following is true?

  • We can take the credit of $500 but can only deduct $1500 of the $2000 paid.
  • We can take the credit of $500 but cannot deduct ANY of the $2000 paid.

If this works like most of the General Business Credits, I would think the first selection to be true.

Share this post


Link to post
Share on other sites

@Edsel , it's clearly covered in the instructions. See below.  Also, I edited your original title so readers don't think this is 'N/T' :

 

20190919_100541.jpg.ad85d543780886044d7c726250da091d.jpg

Screenshot_20190919-095126.thumb.jpg.ad1fb7e665309e46736d6327cbcadd9b.jpg

 

Edited by jklcpa
added tag, statement re: edit

Share this post


Link to post
Share on other sites

Judy's info is, as always, correct.

Reduce the deduction by whatever was used to get the credit.  In that regard, it's like education credits.  You can take a deduction or a credit, but not both with the same funds.  You can take both if you use different funds.  In this case, by reducing the deduction amount by that $1,000 used towards the credit.

Share this post


Link to post
Share on other sites

Thanks folks - I need to get this straight...because it will determine whether we choose the credit or not.  Remember they are in a 35% tax bracket (plus 5% for state), so we want to be careful to not lose more than we gain.

Start-up Costs:  $2000.  Credit equals 50% of first $1000, or $500 credit.

Deduction for start-up costs:   $2000 minus $500 credit, or $1500??  I'm trying to read Judy's text above.

If the deduction is only $1000, taking the credit is almost worthless.

Thanks for all who have responded...

 

p.s. this has convinced me I need to brush up on the general business credits.  There's a wheelbarrow full of them.

 

 

 

  • Like 1

Share this post


Link to post
Share on other sites

Use $1,000 of costs towards credit, which is 50% of the costs.

That leaves $1,000 of costs to use for deduction.

You can also see if just using the deduction works better.  Sometimes it's funny that way, and does give the client a better outcome.  There may even be a sweet spot where $1,500 deduction and $500 towards credit ($250 credit) is best.

Share this post


Link to post
Share on other sites
37 minutes ago, Catherine said:

Use $1,000 of costs towards credit, which is 50% of the costs.

That leaves $1,000 of costs to use for deduction.

You can also see if just using the deduction works better.  Sometimes it's funny that way, and does give the client a better outcome.  There may even be a sweet spot where $1,500 deduction and $500 towards credit ($250 credit) is best.

No, I disagree with this  ^^.

The instructions are clear that the the otherwise allowable deduction is reduced by the amount of the credit on line 2 of the form, NOT the amount of expenditure used to generate the credit.

If line 1 says to not enter more than $1,000, then the amount on line 2 is $500.  So,  in Edsel's client's case, the expenditure before considering any credit of $2000 is then reduced by the credit of $500, and  the remaining allowable deduction is $1,500. 

  • Like 1

Share this post


Link to post
Share on other sites
8 hours ago, Catherine said:

Judy's right, as usual.  Why do I even bother to respond?  😉

Keep responding Catherine.  You are as gracious a member as we have, and are rarely wrong.

For what it's worth, I think she's right too after reading the texts very carefully.

 

  • Like 1

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Restore formatting

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

×
×
  • Create New...