Despite the pandemic, many small businesses saw profits in 2020. As they begin calculating their final tax liability, they now realize that their liability exceeds expectations. They ask themselves the question, what other business deductions can I take in 2020?
Consequently, additional deductions hold real value. One such deduction hides within the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act”). This plan allows employers to make a major adjustment to their income after the end of the tax year.
How the SECURE Act Impacts Businesses
Beginning in 2020, the SECURE Act permits businesses to adopt a qualified retirement plan by the due date of the employer’s tax return, including extensions. Businesses and their advisors may wish to explore how a new plan could serve as an effective tax planning tool as some businesses are also finding that they have more cash on hand than anticipated.
Consider the case of Jon Doe, LLC. Jon turned 58 years old in 2020 and has never had a retirement plan for his business. Prior to 2020, Jon could not adopt a new retirement plan if he hadn’t done so by December 31. This year, Jon can review his 2020 tax liabilities until September 15, 2021 and determine if a retirement plan makes sense. If Jon had a particularly good year, he may be able to implement a retirement plan (or plans) for 2020. By doing this, he could reduce his taxable income by over $250,000!
Keep in mind that even if a business currently sponsors a retirement plan, the SECURE Act allows them to “add” an additional plan after the end of the tax year. Consider the case of a partnership that currently sponsors a cross-tested safe harbor 401(k) plan.
A business that is a good candidate for a cross-tested 401(k) plan is usually a good candidate for a cash balance plan as well. If there is extra cash on hand, the business may wish to implement a cash balance plan for 2020. A 5-member partnership could see their overall taxable income reduced by over $1,000,000.
Using the SECURE Act for Client Retention
Tax and financial advisors’ awareness of this new SECURE Act provision may also serve as an important client retention and acquisition tool through informing clients of this new provision and its tax and financial ramifications.
Businesses should note a couple of provisions not changed by the SECURE Act. First, while the extended due date of some tax returns is October 15, defined benefit plans must be funded by September 15 and therefore must be in place no later than that date. Second, employee contributions to 401(k) plans can only be made in the year to which they pertain.
Retirement plan professionals at Watkins Ross can design and implement a new plan for you or your client using this new provision to your financial advantage. Feel free to contact us at (616) 456-9696.