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It’s Not Too Late to Do a SEP

People grow up in America dreaming big. They want to be their own boss. There will always be those who shun the 9-5 job and who are drawn by the potential of starting their own business, and who can blame them. With the markets in unchartered waters—hello, DOW 20,000—it demonstrates that sometimes big risks reap big rewards. Any successful, profitable business at year’s end ultimately faces the same realization…tax time.

If you’re a business owner who’s going to have to write a check to the IRS this year, you may want to consider a Simplified Employee Pension (SEP). If you don’t already have a qualified plan, you can still implement a SEP IRA and claim the tax deduction for the 2016 tax year. A business owner can set up a SEP for the 2016 year as late as the due date (including extensions) of their business’ income tax return for that year.

For a business owner, the contributions they make on behalf of themselves and for each eligible employee are generally tax-deductible. The business can contribute up to 25% of pay, not to exceed $53,000 (for 2016) for each eligible employee, including the business owner themselves. In a SEP, you’re not locked into making contributions every year as there is flexibility. In fact, if a business funds a SEP for the 2016 year but wants to create a different type of qualified plan for the 2017 year, they could do so and potentially roll over the balance from the SEP into the new qualified plan.

Sole proprietors, partnerships, LLCs and corporations, including S corporations, can set up a SEP. The IRS provides the necessary documents to establish the plan (IRS Form 5305-SEP). You do not have to file any documents with the government; therefore, the cost to administer the plan is very low.

While discussing the SEP opportunity to help your business in 2016, this would be the perfect time to discuss and plan for 2017 as well. Before making any decisions regarding qualified plans, business owners should consult with their tax professionals to ensure that a SEP makes sense for their specific circumstances.