Who here likes paying more taxes than they need to? No one? I didn’t think so! There are many tax deductions a shop owner can take, but the single best one is contributing to a business sponsored retirement account. It is a 100% deductible expense by contributing, and is tax deferred while the asset grows to your full retirement age. Paar Melis is known to be aggressive in tax planning and interpretations, but we will not talk about any sort of creative deductions until your retirement contribution is maxed out for the year. There is nothing else out there that you can “pay yourself” and get a full deduction for putting money in your own pocket.
A retirement plan is a great tool for shop owners to use to lower taxable income, increase retirement savings, and even manage the future of their business. It is a tool no shop owner can afford to ignore.
“My business is my retirement.” This is a statement that we hear far too often from shop owners. In reality, your business is probably worth much less than you would like, and it will not provide sufficient cash on its own to fund your retirement. The value is going down with less people wanting to purchase a shop. Shops are sold based on money available to the owner and a multiple of 2.5-3 times your average annual take home amount. This means that if you were to strip down the business and take all the cash out that is possible, the value of your business is worth 3 times this amount on the high end. You know what your business makes – do you think that you could live through retirement off 3 times that number? Probably not.
NOT contributing to a retirement account is just like writing a check directly to Uncle Sam. Whether it is a couple of years or a couple of decades until you plan to retire, NOW is the time to be sure you are putting as much as possible away for your future. The key is to take full advantage of your plan – you want to secure a retirement that allows you to have the same standard of living as you do now. You might use a retirement plan just for the tax savings, but it also needs to fund your “life savings.” What if you live to be 100?
There’s a tax credit available for many small businesses (100 employees or fewer) starting a small business 401(k) plan for the first time. If you qualify, you can get a $500 credit for each of the first three years of a new plan. You can also deduct any plan management expenses you pay as well as any matching contributions the shop makes to employees participating in the plan.
Finding and hiring qualified techs is a real challenge for shop owners right now. Any qualified candidate is going to choose the shop with the more attractive benefits, including a retirement plan. But it’s more than just attracting new and qualified employees, it’s about keeping the ones you already have. You certainly don’t want to lose any employees because you don’t offer a retirement plan – those employees need to think about their future as well.
A traditional 401(k) retirement plan has the ability to reward you and your employees. Offering an employer match can kickstart your employees’ savings and motivate them to save more of their own income. Additionally, catch-up contributions allow employees age 50 and over to save an extra $6,500 beyond normal maximums as of 2021.
However, there are limits on how much you, as a shop owner, can save in your shop’s 401(k) plan. For most people in 2020 and 2021, the limit is $19,500 (plus the additional $6,500 for those age 50 and over). But as an owner, the amount you can contribute is dependent on how much your employees contribute. Educating and encouraging all employees to save more will benefit everyone. Read more about 401(k) here.
An alternative plan is the SIMPLE IRA. This retirement option does not have the start-up and operating costs like a conventional plan. With a SIMPLE IRA, the employer is required to contribute to their employees’ accounts, whether the employees do or not. An employer must match up to 3% of an employee’s contributions or provide a 2% non-elective contribution. The amount an employee contributes from their salary to a SIMPLE IRA cannot exceed $13,500 in 2021. Catch-up contributions for employees over age 50 cannot exceed $3,000 in 2021. You can read more about the SIMPLE IRA here.
Overseeing your company’s retirement plan requires a thoughtful, strategic approach. Work with your accountant or other financial professionals to ensure you are getting the most out of your plan. Making the right choices today will be beneficial for all participants—including you.