How do you claim the deduction for contributions to small business pension plans

The way you report and claim the deduction is the same for all three types of plans. If you are a sole proprietor, you deduct the contributions as a business expense on Schedule C - Profit or Loss from Business, or on Schedule F - Profit or Loss from Farming. You can deduct your business contribution for your own retirement as an adjustment to income in determining your adjusted gross income on Form 1040.

Tax Credit for Pension Plan Startup Costs

You may also claim a tax credit of 50% of the costs involved in setting up and administering a SEP, SIMPLE, or qualified plan, and educating employees about the plan, up to a maximum of $500 per year for each of the first 3 years of the plan. To take the credit you need to complete and file Form 8881 - Credit for Small Employer Pension Plan Startup Costs.

Final Note

Setting up a retirement plan for your small business does not have to be a complex process. You can choose the type of plan that most closely fits the needs of your business. By setting up a retirement plan, you will be providing an important benefit to your employees, and you can use the tax breaks available, which are intended to encourage saving for retirement by small business owners and their employees.