Michael called me after meeting with his accountant.
“David, I just got a preview of my 2025 tax bill. Let’s just say it wasn’t a particularly enjoyable meeting. He told me we should have considered setting up a retirement plan before the end of last year. Our tax return is on extension, but 2025 is over. Did we miss our chance?”
“Not necessarily. You may still be able to establish and fund a retirement plan in 2026—and take the deduction on your company’s 2025 tax return.”
“How is that possible?”
“You can’t go back in time and make 401(k) salary deferrals from compensation paid last year—that ship has sailed—but employer contributions are a different matter. For you, a cash balance plan—perhaps combined with a profit-sharing plan—could potentially generate a substantial 2025 deduction.
“How substantial?”
“Given your age, possibly $300,000 to $350,000.”
“That sounds great.”
“It might be, but you have employees, so we first need to determine what the plan would require you to contribute for them. This is where plan design becomes critical.
“How much older are you than most of your employees?”
“Most are quite a bit younger than me.”
“Good. That age difference creates an opportunity to allocate a much greater share of the contribution to you while still providing meaningful benefits to your employees at an affordable cost, thus satisfying the IRS’s discrimination rules.
“Is there a downside?”
“A cash balance plan is not something you establish simply because you had one unusually profitable year and want a large deduction. It creates an ongoing funding obligation and it generally works best for established businesses with strong, predictable cash flow. The goal is to reduce taxes without creating a future cash-flow problem.”
“So how much time is left to claim those 2025 deductions?”
“For many calendar-year businesses, the funding deadline is September 15. Miss it, and excise taxes will to accrue.
“And there is quite a bit to get done before then. We need employee census data, ownership and compensation information, plan-design calculations need to be done, plan documents need to be created and signed, and investment accounts need to be established.”
Michael sent us his employee census that afternoon.
If you are still looking for a meaningful 2025 tax deduction, there may still be time. Call the experts at Concierge to set up the best plan for you.