form 8881 for S-Corp

[HOPE2]

Marry Christmas.

Do we have a CPA in our community by the chance, I need a help walk through how to file 8881 for a S-Corp. Also I would like to understand simply what line 7 and 8 mean : 

7- Credit for small employer pension plan startup costs from partnerships and S corporations

8 -Add lines 5, 6g, and 7. Partnerships and S corporations, report this amount on Schedule K. All others,
report this amount on Form 3800, Part III, line 1j 

What is the first step? and so on.....

[qbteachmt]

You want to know what line 7 means? In general, the SECURE Act provided that some incentives for the employer are made available and shifted from expense (deduction) to general business tax credit (and then passed through on K-1 to the individuals). It included offering auto-enrollment.

Remember this topic of yours from back in Nov regarding contributions: https://accountants.intuit.com/community/proseries-tax-discussions/discussion/1120-s-contribution-li...

There is a line there with instructions for "not claimed elsewhere"

You have to read the instructions to know eligibility and limits, including number of employees is a limiting factor, there is a credit maximum, and which year this is filing for (including if this is the year prior to the effective date for the plan). I found this breakdown that seems easy to follow:

https://support.taxslayerpro.com/hc/en-us/articles/1260807637429-Form-8881-Credit-for-Small-Employer...

I didn't find a ProSeries help article, but these might be useful, too:

https://accountants.intuit.com/support/en-us/help-article/partnership/entering-form-8881-credit-smal...

https://accountants.intuit.com/support/en-us/help-article/partnership/entering-form-8881-credit-smal...

And: https://erctoday.com/form-8881-pension-plan/

And line 8 is the math, and that is getting you to the credit, and you reduce business expense by the amount being used to qualify for the credit.

Does that help?

[HOPE2]

You want to know what line 7 means?  YES, PLEASE. 

Just let you know I already have read all articles and links you posted here, If you did not file 8881 before certainly hard to figure it out.

Tax form is 1120-S and should file 8881, but line 7 says : Credit for small employer pension plan startup costs from partnerships and S corporations.

I want to file S-Corp, 1120-S, and line 1 to 5 are about this credit for a  S-Corp, so what is line 7 then?

Who knows what is this and in what case does line 7 have an amount? An example would be greatly perfect.

 Code C on box 16 on K-1 has same amount of code P on box 13 of K-1! Am I right? Is this as nondeductible Code C ( The nondeductible expenses paid or incurred by the corporation aren't deductible on your tax return. Generally, you must decrease the basis of your stock by this amount)

Why this cost is nondeductible on K-1?

[qbteachmt]

"in what case does line 7 have an amount? An example would be greatly perfect."

Did you read all of this specific article: https://erctoday.com/form-8881-pension-plan/

The SECURE Act encourages employers to establish, expand, and/or increase the participation and options for employer retirement plans, and that's what Form 8881 is for. There was an update and an expansion of that Act as well as new provisions. All of this is from 2019 and 2020.

There are specific examples and a lot of explanations in that article. That's why I included it. HR and benefit plan administration resources will give you details you don't find in tax prep material. That's because the service providers want to be hired by your small business clients. They are trying to drum up business.

"To calculate this credit, you need to determine what qualifies as startup costs. According to the IRS, eligible expenses include those related to:

• • Creating or setting up a qualifying retirement plan

• • Educating employees about the plan

• • Obtaining necessary legal advice

The amount of credit you can claim is 50% of these qualified costs, up to a maximum limit per year."

And:

"The max potential tax credit allowable is $500/yr for the initial 3 yrs of plan initiation. That means you could save up to $1,500 over three years by setting up an employee pension scheme."

And:

"Form 8881 can directly reduce the amount of tax owed by a business in a given year. The credit equals half of the cost paid or incurred in each of the three years beginning with the year the plan becomes effective, up to $500 per year.

So, if you spent $1000 setting up and administering your company’s new pension plan and educating your employees about it, you could claim a $500 tax credit using Form 8881."

And:

"Small businesses can claim administrative costs and costs to educate employees about the benefits and options as part of the tax credit."

And:

"The small employer auto-enrollment credit is available for application in section 45T and as a part of the general business credit.

The employer is eligible for $500 per eligible employee; that’s part of the eligible automatic contribution arrangement for each employee. The business can also qualify for the next two years for $500 per employee auto-enrolled as long as the plan remains in place."

"Code C on box 16 on K-1 has same amount of code P on box 13 of K-1! Am I right?"

Box 16 is items affecting basis. Box 13 is tax credits.

"Why this cost is nondeductible on K-1?"

Box 12 is deductions.

Something might be a deduction for the business, a credit for the business, a passed through deduction, a passed through credit, and/or an adjustment to basis. And of course, you need to know Fed and State treatment (compliance with the SECURE Act and the Consolidated Appropriations Act).

All of these are different means of tax treatment, and how it affects something else, and based on the reporting entity. "It’s important to note that when you’re working through Form 8881, the business must reduce your deduction for start-up costs by the credit amount on line 5."

Examples for individuals:

A person can have high medical expense, so they itemize to take that as a deduction on a schedule (worksheet). Or, a self-employed person can deduct their health coverage premium "off the top." But an employee of a major corporation might have health coverage at work, so that is nondeductible for them. It's three different ways that specific type of "cost" is treated in the tax code.

Perhaps you want to read up on General Business Credits (Form 3800)? We went through this for handling the ERC (which really is ERTC). There were preparers trying to put it onto business credit, pass through to the individual via K-1. But it was an adjustment to the expense (operations) and not a credit to pass through to the individuals. It was confusing because there was an older existing "retention credit" that had nothing to do with the covid-era retention tax credit.

[HOPE2]

Hi to community.

Has anyone in this community ever filed form 8881 to help me for?

[HOPE2]

Thanks a lot. I think this credit is max $5000 not $500.

Sorry, still I do need to understand what is line 7 however I read all articles related 8881 but did not get it.

If when an S-corp's credit goes on Sch  K and K-1, when line 7 does have an amount?

I was wondering while the setup costs are incurred in the first year and it is done and employees contribute ongoing basis how come this tax credit is spread over three consecutive years? it means employer can apply this credit for 3 years if employer run this set-up one more time in the next year and third year? 

And should employer have contribution in Auto-enrollment plan?

I do not know why when I complete this form 1-5, the cost deducted from line 17?

And If employer did not have any number for plan contribution RED ERROR popes up. Should enter the cost on there?

Practically answer would be great rather than impractical.

[qbteachmt]

The employee contribution is from their wages. That isn't part of the costs for administration or operation or establishing the plan (not part of the credits here).

The addition of auto-enrollment is as an incentive for the employer. It's a signup option, not part of contributions.

One reason employers set up a SIMPLE IRA plan is that a 401(k) has more costs to set up and administrate. That's an example of a less lucrative plan for the employees, because there is a cost savings to the employer, but the provisions with these two Acts allow for the employer to realize a benefit even if setting up the higher cost plan.

"I think this credit is max $5000 not $500."

Yes. As explained in that article, this started in 2019, expanded in 2020, and was modified in 2023: "In December 2023, Congress passed the Consolidated Appropriations Act (CAA) as part of its COVID-19 relief measures. The CAA expanded on many aspects of the SECURE Act, including increasing credit rates under the IRS Form-8881 from half up to $500/year to up to $5,000/year."

That's why I offered this article to you.

"can apply this credit for 3 years if employer run this set-up one more time"

There are not further setup costs. The provisions for this credit are for more than just setup, and for more than the first year. There is only one startup for a plan. There might be ongoing legal guidance. There is education provided to info employees and enrollment period costs, and other administrative and operational costs. The plan can have startup in the year before it becomes on offer, as well. That's why you would need to read through all the eligibility criteria.

I suggest making a professional connection to a benefit plan provider. Network with others who specialize in the various touchpoints you run into. No one is expected to know everything; you want resources.

[HOPE2]

Hi to all . Is anyone in our community by the chance who already filed 8881, I need a help walk through how to file 8881 for a S-Corp. Also I would like to understand simply what line 7 and 8 mean : 

7- Credit for small employer pension plan startup costs from partnerships and S corporations

8 -Add lines 5, 6g, and 7. Partnerships and S corporations, report this amount on Schedule K. All others,
report this amount on Form 3800, Part III, line 1j 

What is the first step? and so on..

I was wondering while the setup costs are incurred in the first year and it is done and employees contribute ongoing basis how come this tax credit is spread over three consecutive years? it means employer can apply this credit for 3 years if employer run this set-up one more time in the next year and third year? 

And should employer have contribution in Auto-enrollment plan?

I do not know why when I complete this form 1-5, the cost deducted from line 17?

And If employer did not have any number for plan contribution RED ERROR popes up. Should enter the cost on there?

[qbteachmt]

I know you are learning about a lot of new provisions. I am trying to help you, because I know this stuff. I do plan administration and I gather the required info for eligibility and qualification. I help small businesses with making decisions on benefit plans and comparative shopping. I hold informative sessions and provide paycheck inserts for employees, especially this time of year for bonuses, enrollment, and W4 updates. You're not asking about how to use the program. You keep asking what and why, not how.

"I would like to understand simply what line 7 and 8 mean"

I'm not sure if you are stuck here on "credit" or "small employer" or "startup costs" or "partnership and S corporations." You keep reiterating "What's it mean?" but what is the It you are asking about? You need to ask the specific question, please. Otherwise, it means what it states. Find out about the employing entity and their plan(s) and the required info (employee census). If the qualifying criteria is met, and your entity is opting to submit for the credit, you fill in the data which applies. These incentives are written towards specific reporting entities. Form 3800 is the General Business Credit, as I noted previously. Expenses that are instead of this credit will be deducted on the entity's tax form as part of operations. K becomes K-1 data, and like the Form 3800, passed to the individual's tax form(s). You already commented on the codes for that data.

"8 -Add lines 5" <== value is based on the number per employee or the limit

"6g" <== based on the timeline for the plan existing

"and 7" <== Qualifying amount of the costs

"Partnerships and S corporations, report this amount on Schedule K. All others, report this amount on Form 3800, Part III, line 1j"

Yes, this will be passed to the appropriate next step, depending on the entity type.

"What is the first step? and so on.."

Know the entity type that has the possibility to qualify for the credit, be doing that tax return, find out if their plan qualifies, opt to take advantage of that status. Get the details, such as # of employees, etc.

"I was wondering while the setup costs are incurred in the first year and it is done"

Or, the setup is done in a prior year, to be effective in the new upcoming year, and you can elect that prep year to be treated as the first year.

"and employees contribute ongoing basis"

You may be referring to employer's contribution? The match? Or, the employer's nonelective contribution to an employee (which is like a bonus)? Because the employee participation from wages is elective deferrals as you see on 6b and 6c.

"how come this tax credit is spread over three consecutive years?"

It spreads over one or more years, and it is claimable in the prep year or not, because Congress provided for those details. It's part of incentives, to get employers to get involved. If you really want to know the details, you have to trace it back to the original submission for the Bill. You can read here:

https://www.federalregister.gov/documents/2023/11/15/2023-25148/proposed-collection-comment-request-...

and I found this for the Form:

https://www.asppa-net.org/news/irs-updates-form-8881-reflect-effort-expand-coverage

and I found another blog article that might help:

https://www.paycom.com/resources/blog/retirement-plans-startup-costs-tax-credit/

"it means employer can apply this credit for 3 years if employer run this set-up one more time in the next year and third year?"

There is no further "setup" year. That's not what the 3-year means; it does not require another round of "setup" because the plan is already established.

"And should employer have contribution in Auto-enrollment plan?"

It's an optional feature, that the employer can make a specific contribution to someone's retirement under the eligible retirement plan. That's one reason these are called Defined Contribution plans, and not Defined Benefit plans

"I do not know why when I complete this form 1-5, the cost deducted from line 17?"

From the instructions: "No Deduction Allowed for Credit Amount
You must reduce your otherwise allowable deduction for startup costs by the credit amount on line 5."

You don't need to apply for the credit. The entity might not qualify for the credit. The plan might not qualify for the credit. You are using an available option. You never get to double-dip. Employers may not claim the credit and deduct the same expenses that helped them qualify. If you don't want to take the credit, stop using Form 8881. Take costs as an ordinary expense, instead. No additional special credits allowed.

"And If employer did not have any number for plan contribution RED ERROR popes up. Should enter the cost on there?"

Contribution is the amounts to employee accounts. The retirement plans tax credit may be claimed for expenses that are ordinary and necessary to:

• set up a new retirement plan
• administer the plan to employees
• inform workers about their new option

You seem to be trying to put the same values into multiple places. You might not need to try this at all for a specific entity. Perhaps the employer doesn't qualify (perhaps too many employees) or the plan doesn't qualify, or both. From the instructions: "However, you are not an eligible employer if, during the 3 tax years preceding the first credit year, you established or maintained a qualified employer plan with respect to which contributions were made, or benefits were accrued, for substantially the same employees as are in the new qualified employer plan. See section 45E(c) for rules for controlled groups and predecessor employers."

[HOPE2]

Thanks a lot, was very helpful.