It is springtime and thoughts turn to warmer weather, training outside, and filing taxes – two out of three’s not bad!
The Good News: Being an owner of a Krav Maga school provides many legal opportunities to minimize taxes, not the least of which is taking a portion of the profit generated by the school to provide for the owners’ future while saving taxes on current income tax payments. There exists a wide range of Qualified Retirement Plans, with varying requirements, however for the purposes of this article I am assuming the martial arts school (Krav Maga, Karate, Kung Fu, MMA, Ju Jitsu or other) is either a corporation or an Limited Liability Corporation (LLC) and will focus on the more common and easier to establish plans for such entities:
- A Simple IRA
- A Simplified Employee Pension (SEP)
Before I review each plan option, keep in mind that this is a general overview to activate discussion with your advisors and should not be treated as a complete description of all facets of each plan. Additionally, there are certain criteria and parameters regarding who is eligible, how much salary can be deferred, and if or when, you as an employer must fund an additional contribution to the Plan for the employees benefit.
A SIMPLE IRA plan provides small employers with a simplified method to contribute toward their employees’ and their own retirement savings. Employees may choose to make salary reduction contributions ( i.e. the employee puts in contributions from their own salary ) and the employer is required to make either matching or non-elective contributions. Contributions are made to an Individual Retirement Account or Annuity (IRA) set up for each employee (a SIMPLE IRA) with a deferral per person up to $12,000 in 2014 and $12,500 in 2015 ( or if you are over 50 years old $14,500 in 2014 and $15,500 in 2015).
A Simplified Employee Pension (SEP) plan provides business owners with a simplified method to contribute toward their employees’ retirement as well as their own retirement savings. Contributions are made to an Individual Retirement Account or Annuity (IRA) set up for each plan participant (a SEP-IRA). The annual contributions you can make to each employee’s SEP-IRA cannot exceed the lesser of 25% of compensation, or $52,000 for 2014; $53,000 for 2015.
A 401(k) is a feature of a qualified profit-sharing plan that allows employees to contribute (defer) a portion of their wages to individual accounts. The Elective salary deferrals are excluded from the employee’s taxable income with limits equal to $17,500 in 2014 and $18,000 in 2015 (or if you are over 50 years old $23,000 in 2014 and $24,000 in 2015). Note – Employers can or may be required to contribute additional amounts to the Employees account.
There is also a one-participant 401(k) plan, sometimes called a Solo 401(k), which is designed for a business owner with no employees and has the same deferral limits.
Keeping in mind which of these plans fits an individual martial arts school, its tax structure, and its owner’s desires will determine what form of plan is instituted. The one undeniable fact regarding all these options is – establishing a plan and funding it will save tax dollars and the sooner a Plan is established, and consistently funded, the more comfortable and secure your retirement will be.
“The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted.”
SUPREME COURT OF THE UNITED STATES
GREGORY v. HELVERING
293 U.S. 465; (1934)