I did my taxes this weekend. Well, really, I didn’t do them. I just put them together for my CPA to do them for me. Even though I spent a part of my career working at a CPA firm there is no way for me to keep up with the complexity of personal income tax law. I rely on a professional to perform that service for me.
CPAs and TPAs work together a lot. Business owners looking for tax deductions will often look to retirement plans to help them slash their tax bill. The wonderful thing about retirement plans for tax deductions is that the contribution isn’t really an expense – it’s an investment. It’s an investment in the employees, and it’s a tax-favored investment for the business owner too.
My advice to business owners is to compare the retirement plan against your tax bracket: If I can allocate more to your retirement account than you would take home in cash after taxes, then the plan is a no-brainer! The choice to be made is to either invest in your employees or pay Uncle Sam. Why not save on taxes through a retirement plan instead?
For a retirement plan to pack a punch in 2012, though, the business owner needed to plan ahead. Qualified retirement plans must be established before the end of the tax year in order to have a tax deduction available for that year. And to have the most flexibility in designing a retirement plan to help with tax deductions, the plan really needs to be in place – up and running – for at least 3 months. The only type of plan that a business person can establish now for 2012 is a SEP-IRA. Better than nothing, but SEPs have extremely limited plan design.
There is certainly more to retirement plans than 401(k). Even with 401(k) there are dozens of different ways to combine employee contributions (pre-tax and Roth), matching contributions (percentage or flat dollar amount, fixed or discretionary), profit sharing (choose from among 4 different types of contribution formulas), and other employer contributions (Prevailing Wage, or Safe Harbor).
Then for business owners who are looking at even greater tax deductions and retirement investments, we introduce traditional pension plans like cash balance plans. By pairing a pension to a defined contribution plan, the contribution for the business owner can often be as high as $150,000! That kind of contribution can certainly help as a tax deduction.
Then the cherry on top – there is a $500 tax credit available for businesses who establish a new retirement plan to offset set up or administration costs. This credit is available for the first 3 years of a new retirement plan.
I’m in no way a tax specialist. But I can certainly help business owners see how a retirement plan might be a tremendous tax deduction for them. Retirement plan law is complex. And just like I go to my CPA to have my taxes done, business owners who want the most creative retirement plan designed specifically for their needs go to their local TPA for the best advice in this demanding an complex field. If you’re looking for a retirement plan tax deduction (to save on taxes through a retirement plan) let us see what we can come up with for you!
Piggy Banks are available at http://www.ladiesandgentlemenstudio.com/chalk-it-to-me-piggy
Photo by Ladies and Gentlemen Studio
