There are credits that are available for both businesses and individuals who operate or participate in a retirement plan.  Small businesses can receive a credit of up to $500 a year for the first three years for starting a new pension plan, and individuals can receive up to a $2,000 credit each year for contributing to a pension plan.  Here are the details.

The Credit for Small Employer Pension Plan Startup Costs is based on 50% of the expenses incurred to establish or administer a pension plan up to a maximum credit of $500 for the first credit year and each of the two taxable years immediately following the first credit year. To be an eligible Small Employer the company must meet the following qualifications:

  • Have less than 100 employees in the tax year before the establishment of the pension plan.
  • Paid the employees at least $5,000 in compensation in the prior year.
  • Not have had an established pension plan for the prior three tax years.

Retirement Plan CreditsMost pension plans will meet the definition of a qualified plan, including; SEP-IRA, Simple Plan, and certain Annuity Plans.

The credit is a general business credit and can be carried forward and back.

One last point, the credit amount must reduce the allowable startup expenses you deduct on your tax return.  For example, if you incurred $1,500 in startup expenses and qualified for the $500 credit, you would only be able to deduct $1,000 in startup expenses on your tax return.

The Retirement Savings Contributions Credit is based on a percentage of your contribution to a retirement plan, to a maximum contribution of $2,000, including contributions to an IRA or a Roth IRA. The credit rate is based on your modified adjusted gross income level and filing status and can be up to 50%.

The following table indicates the appropriate credit rate percentage based on your income level and filing status.

Joint Filers Head of Household Single & Married (Filing Separate) Credit Rate
$0 to $33,500 $0 to $25,125 $0 to $16,750 50%
$33,501 to $36,000 $25,126 to $27,000 $16,751 to $18,000 20%
$36,001 to $55,500 $27,001 to $41,625 $18,001 to $27,750 10%
Over $55,500 Over $41,625 Over $27,750 0%


As an example, a married couple with adjusted gross income of $48,000, made a $3,000 contribution to the husband’s 401(k) salary reduction plan and the wife contributes $1,000 to a Roth IRA.  Both are eligible for the credit at 10% based on the above table.  The husband qualifies for a $200 credit, 10% of the maximum contribution amount of $2,000, and the wife qualifies for a $100 credit, 10% of her $1,000 contribution for a total credit of $300.  Note, if the husband contributed $2,000 to his 401(k) plan and the wife contributed $2,000 to a Roth IRA, the credit would have been $400.

A few things to note: to claim the credit you must have been born before January 2, 1992, not be a full time student, even for five months of the year, and cannot be claimed as a dependent on another person’s tax return.  The credit is nonrefundable and cannot be carried forward or back so the taxpayer must have some tax liability. 

If you have any questions, please feel free to give us a call at 919-942-8700.

About Blackman & Sloop CPAs, P.A.:

Blackman & Sloop is a full-service CPA firm headquartered in Chapel Hill, North Carolina and is actively involved in auditing, taxation, management consulting, financial planning, and related services. The firm directs a large part of its services toward providing management with advice on budgeting, forecasts, projections, financing decisions, financial analysis, and tax developments. The firm also performs review and compilation services and prepares not-for-profit, corporate, individual, estate, retirement plan, and trust tax returns as well as technology consulting services regarding installation and training on QuickBooks. Blackman & Sloop provides services in Raleigh, Durham, Chapel Hill, RTP, Hillsborough, Pittsboro, Charlotte, and the rest of North Carolina. To find out more please visit

Contact: CPA

Toll Free: 1-877-854-7530
The Exchange West
1414 Raleigh Rd, Suite 300
Chapel Hill, NC 27517