Kris G

Are the contribution that qualify for the employer contribution portion of the Start-up contribution tax credit based on: 1. Contributions actually made during the tax year you are taking the credit for (2023 credit uses only eligible employer contribution actually paid prior to 12/31/2023) 2. Contributions applicable to the 2023 regardless of when they are paid. (Inclusion of contribution for 2023 that are either paid in 2023 or as a receivable payment in 2024) The draft instructions for form 8881 which were just released this month would not seem to be clear. The instructions use the language "made by an eligible employer for the first tax year during which the plan becomes effective with respect to the eligible employer and the succeeding 4 tax years."

Can a new small employer claim the tax credit for qualified start-up costs in the first year of the company's existence? Assume - Employer begins operation in 2023 (No employees prior to 1/1/2023) Employer starts their new plan during 2023 and pays start-up costs for plan design, documents and plan installation during 2023 Can this employer take a start-up plan tax credit for 2023 for qualifying start-up costs? Concern is that one of the requirements to take the credit for qualified start-up costs is that you have to use the number of employees of the employer who received at least $5,000 of compensation from the employer during the tax year preceding the first credit year. A new employer has no preceding tax year to make this determination. Would seem to be two options: 1. There is no credit available in the first year if a new employer establishes a new plan in its first year of existence. 2. For new employers you would use the current year to make the determination since there is no preceding year. It would seem without some revision to the instructions or other guidance from the IRS that the credit would not be available for the first year. This would not seem to be the intent of the law but how it should be applied based on how for form 8881 and instructions were drafted.