Retirement Benefit Plans

Retirement benefit plans include qualified employee benefit plans, nonexempt trusts and annuity plans, self-employed retirement plans, indiv idual retirement arrangements, and simplified employee pension plans. The tax treatment of contributions to these plans is highly technical; also there are frequent changes in tax laws that affect the treatment of those contributions. A business owner contemplating such a plan or making deductions for contributions to the plan should obtain the advice of competent counsel. Note: Whenever the term “IRA” is used in the following paragraphs, generally speaking the discussion applies to both conventional IRAs and Roth IRAs.

Sole Proprietorship

A sole proprietor may establish and contribute to a Keogh retirement plan. Depending on the proprietor’s adjusted gross income and net earnings from self-employment, he or she may open and contribute to an individual retirement account (IRA) in addition to or in place of the Keogh plan. Qualified contributions to the sole proprietor’s own Keogh plan or IRA are deductible (with some exceptions) in determining the proprietor’s adjusted gross income on Form 1040. Those contributions are not considered expenses of the business, however, and therefore are not deductible in computing net income from the business on Schedule C. Minnesota generally follows IRS rules in the tax treatment of Keogh and IRA contributions. A sole proprietor who has employees may establish a qualified retirement plan for the employees. Contributions to the plan, if they meet IRS requirements, are deductible from business income reported on Schedule C.

Partnership

Like sole proprietors, working partners in a partnership may contribute to a Keogh plan established by the partnership. They also may open and contribute to an IRA if they meet income limitations for such contributions. Qualified contributions by each partner may be deducted (with some exceptions) in computing their individual adjusted gross income on Form 1040. Contributions by or on behalf of partners to their own retirement plans are not deductible from partnership income. Minnesota generally follows IRS rules. Retirement plans which are established for employees must comply with Internal Revenue Service requirements. Contributions to qualified plans on behalf of employees are deductible business expenses.

Corporation

Generally, contributions by the corporation to qualified pension plans and qualified profit sharing plans will be deductible by the corporation. The plan must be approved by the Internal Revenue Service. Note: Master and prototype retirement plans may be available to the business. In many cases, it will be easier to use these samples rather than setting up a new plan. Master and prototype plans may be sponsored by trade or professional organizations, banks, insurance companies, or regulated investment companies. These entities usually will have applied for, and received, an IRS opinion letter on the plan. Using one of these master or prototype plans does not mean that the plan is automatically qualified. The plan still must meet all IRS requirements. However, the master or prototype may offer a firm some guidance in developing its own plan.

CREDITS: This is an excerpt from A Guide to Starting a Business in Minnesota, provided by the Minnesota Department of Employment and Economic Development, Small Business Assistance Office, Twenty-eighth Edition, January 2010, written by Charles A. Schaffer, Madeline Harris, and Mark Simmer. Copies are available without charge from the Minnesota Department of Employment and Economic Development, Small Business Assistance Office.

This is also part of a series of articles on How to Pick the Right Business Entity Type. These articles help you select the right business type for your circumstances.

Previous post:

Next post: