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Eligible Employer Small Business Credit Does Not Apply to the Solo 401(k) Plan

The 2001 Economic Growth Tax Relief and Reconciliation Act included a provision that would allow small businesses to You may be claim a tax credit for part of the ordinary and necessary costs of starting a SEP, SIMPLE, or 401(k) qualified plan. The Solo 401(k) credit equals 50% of the cost to set up and administer the plan and educate employees about the plan, up to a maximum of $500 per year for each of the first 3 years of the plan.

The small business can choose to start claiming the credit in the tax year before the tax year in which the plan becomes effective. To be eligible, the small business must have had 100 or fewer employees who received at least $5,000 in compensation from you for the preceding year. However, at least one participant must be a non-highly compensated employee.  Because of this requirement, it would not be possible for a Solo 401(k) Plan to take advantage of the Eligible Small Employer Tax Credit.

An eligible small business would be able to take advantage of the Eligible Small Employer Tax Credit by completing the IRS Form 8881.

For an eligible small employer, the credit is 50% of the qualified startup costs paid or incurred during the tax year. The credit is limited to $500 per year for the first credit year and each of the following 2 tax years. No credit is allowed for any other tax year.

Unfortunately, the Eligible Small Employer Tax Credit would not be eligible for a business with no employees because the business would have no non-highly compensated employees since there would be no employees other than the owner.

To learn more about the Solo 401(k) Plan, please contact a tax expert at 800-472-0646.

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Posted in Solo 401(k)