Your real estate company’s retirement plan is meant to help secure the future for you and your employees. But it can also help you now on your tax return!

Contributions to certain retirement plans qualify as eligible tax deductions for businesses. As a real estate business owner or investor, you can leverage these plans to manage the tax liability for your business.

Retirement plans that qualify for business tax deductibles include the Simplified Employee Pension – Individual Retirement Arrangement (SEP-IRA) plan and the Solo 401(k). Here’s what you need to know about the tax savings opportunities these retirement plans provide.

Simplified Employee Pension – Individual Retirement Arrangement (SEP-IRA)

The SEP-IRA provides a means for business owners to contribute towards retirement savings for themselves and their employees. SEP-IRA contributions are made pretax, which reduces your taxable income on your return. Just remember they’re subject to tax upon withdrawal.

The SEP-IRA contribution/deduction limit for each year is set to the lesser of:

  • 25% of compensation; or,
  • $57,000 for 2020 ($58,000 for 2021)

The compensation limit for determining a SEP-IRA contribution is $285,000 for 2020 and $290,000 for 2021.

If you’re a sole proprietor or a working partner in a partnership or LLC, your compensation limit is calculated differently. It’s based on a special computation that requires adjusting your net self-employment earnings to get your plan compensation amount. Your compensation limit in this case would be your net earnings less one-half of your self-employment tax and contributions to your SEP-IRA. (Note that if your business has eligible employees for SEP-IRA, you’re required to make an equal percentage of contributions for all employees.)

In order to take advantage of tax deduction benefits, you must deposit any SEP-IRA contributions by the federal income tax return due date for the year. (Extension periods may apply.) Any contributions not deposited by then won’t be allowed as a tax deductible for that year’s return. However, they may be allowed in the following year.

One-Participant 401(k)

The one-participant 401(k) retirement plan, also known as Solo 401(k), is similar to a traditional 401k plan with the same rules and requirements. However, the Solo 401(k) differs by providing coverage for a business owner with no employees.

As a business owner, you can make contributions to the Solo 401(k) both as an employer and as an employee:

  • Employee elective contributions can be up to 100% of compensation/earned income. The Internal Revenue Service (IRS) sets an annual contribution limit of $19,500 for 2020 and 2021 ($26,000 for individuals who are 50 or above).
  • Employer non-elective contributions can be up to 25% of compensation plan.

Employer non-elective contributions for self-employed individuals involve a special computation to determine the maximum amount for elective deferrals and non-elective contributions. This computation is the net earnings from self-employment less:

  • One-half of your self-employment tax; and,
  • Contributions for yourself

Total contributions to a Solo 401(k) are limited to $57,000 for 2020 and $58,000 for 2021. This does not include catch-up contributions for individuals who are 50 years of age and older.

Important Takeaway

The SEP-IRA and the Solo 401(k) retirement plans are both great ways to make your retirement plan contributions work for you this tax year. However, you can lose tax benefits if you fail to meet IRS general guidelines and requirements. So make sure you consult with qualified accountants who specialize in these tax returns and filings.

There are other retirement plan contributions that may also qualify as business tax deductibles. The tax experts at James Moore can help you identify the best options specific to your business needs.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.