If you’re a business owner (or sole proprietor) you still have time to fund a profit-share retirement plan and save on your 2022 taxes. In some cases, you can still save even if you haven’t set up the retirement plan yet. The #1 deduction where the IRS loses the most money is retirement planning & profit-sharing tax deductions. I’m here to tell you, you can save too. Honestly, who doesn’t want to send the IRS less money? Here’s what you need to know.
When’s the last day I can fund a profit-share and pay less tax?
The IRS allows you to fund the employer contributions of a retirement plan (also known as the “profit-share”) by the time the business files its tax return. This includes extensions.
Here’s a simple chart that tell you the last day you can fund your profit-share and have it count for 2022:
|Business type||File on time||Extend your tax return|
|Sole proprietor (Schedule C)||4/15/2023||10/15/2023 (if you extend)|
|S-Corporation||3/15/2023||9/15/2023 (if you extend)|
|C-Corporation||4/15/2023||10/15/2023 (if you extend)|
|LLC with multiple members||3/15/2023||9/15/2023 (if you extend)|
Since the IRS allows you to use extensions, you can wait all the way until September or October and still save on your 2022 taxes. Here’s the strategy that most business owners use.
Tax strategy for funding your profit-share
There’s a five-step process that business owners use when funding their profit-share:
- First, get your business tax return almost complete (but don’t file it.)
- Second, have your CPA or tax preparer calculate the maximum amount of your profit-share and your tax savings.
- Then extend the tax return so you can raise the money to fund the profit-share.
- Fund the profit-share (this is usually done during the summer.)
- Finally, file the tax return.
This allows small business owners to raise the profit-share capital in the current year but take the deduction last year (2022.)
This profit-sharing tax strategy buys you time and everybody’s heard the aphorism, “time is greater than money.”
Does this work with all retirement accounts?
No, but it does work with most of them.
The easiest ones to do this strategy with are SEP-IRAs and Solo 401(k)s. However, you can still do this with regular 401(k)s, Simple IRAs, and Cash Balance Plans. However, if you have employees, I recommend first checking with both your CPA and Retirement Plan administrator. That’s because when you have more employees, the IRS has more rules.
Keep in mind, this strategy takes planning, so check with your CPA first. And if you want to read more about the different types of retirement plans you can still set up and have count for 2022, I’ve left links below.