Form 8881 Credit For Small Employer Pension Plan

Form 8881 (Rev. Dec. 2006)
Credit for Small Employer Pension Plan Startup Costs

Purpose:

This is the first circulated draft of the Form 8881 (Rev. Dec. 2006) for your
review and comments. Changes made to the form are explained on the attachment.

TPCC meeting: No meeting is planned, but you may request one by contacting John R. Nelson
Prior Revisions

The 2005 Form 8881 is available at:
http://www.irs.gov/pub/irs-pdf/f8881.pdf

Other products

Circulations of draft tax forms and instructions are posted at
http://taxforms.web.irs.gov/draft_products.html.
Draft publications are not available.

Comments

Please email, fax, or call, any comments by May 26, 2006.

John R. Nelson
Tax Law Specialist,
SE:W:CAR:MP:T:B:P
Phone: 202-927-9488
Fax: 202-622-3262
Email: [email protected]

Major Changes for 2006
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We deleted Part II, relating to computation of the allowable credit from the form.
Beginning in 2006, all taxpayers will be required to complete Form 3800, General
Business Credit, to make this computation.
Beginning in 2006, this form will become a continuous use form. That is, it will
be revised only as needed instead of annually.
We deleted the instructions for S corporations and partnerships. Taxpayers will
need to go to the instructions for their appropriate form (i.e, Form 1120S or 1065)
that they file for additional information.
Instructions for “Controlled Groups” will be replaced with the following:

Member of Controlled Group, Business Under Common Control, or Affiliated
Service Group.
For purposes of figuring the credit, all members of a controlled group of corporations
(as defined in section 52(a)), all members of a group of businesses under common
control (as defined in section 52(b)), and all members of an affiliated service groups
(as defined in section 414(m)), are treated as a single employer. As a member, compute your credit based on your proportionate share of qualified startup costs giving
rise to the group’s credit for small employer pension plan startup costs. Enter your
share of the credit on line 2. Attach a statement showing how your share of the credit
was figured, and write “See Attached” next to the entry space for line 2.
Note: Please disregard the instructions for “Controlled Groups” in this 1st draft. The
above language will appear in the final draft.

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I.R.S. SPECIFICATIONS
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INSTRUCTIONS TO PRINTERS
FORM 8881, PAGE 1 OF 2 (Page 2 is blank)
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8881

Form
(Rev. December 2006)

Department of the Treasury
Internal Revenue Service

Name(s) shown on return

1
2
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5

Action

Revised proofs
requested

Credit for Small Employer Pension Plan
Startup Costs

130

Identifying number

2
3
4

5

Controlled Groups

Section references are to the Internal Revenue Code.

Eligible small employers use Form 8881 to claim the credit for
qualified startup costs incurred in establishing or administering an
eligible employer plan. The credit is allowed only for costs paid or
incurred in tax years beginning after 2001 with respect to qualified
employer plans first effective after 2001.
The credit is allowed under section 45E and is part of the general
business credit. You may elect, however, to have section 45E not
apply for your tax year beginning in 2006 by not filing Form 8881
with your 2006 tax return.

How To Figure the Credit
For an eligible small employer, the credit is 50% of the qualified
startup costs paid or incurred during the tax year. The credit is
limited to $500 per year for the first credit year and each of the
following 2 tax years. No credit is allowed for any other tax year.
Eligible small employer. To be an eligible small employer, you must
have had no more than 100 employees during the tax year preceding
the first credit year who received at least $5,000 of compensation
from you during that tax year. However, you are not an eligible small
employer if, during the 3 tax years preceding the first credit year,
you established or maintained a qualified employer plan with respect
to which contributions were made, or benefits were accrued, for
substantially the same employees as are in the new qualified
employer plan. See section 45E(c) for rules for controlled groups and
predecessor employers.
Qualified startup costs. Qualified startup costs are expenses paid
or incurred in connection with (a) establishing or administering an
eligible employer plan or (b) the retirement-related education of
employees about the plan.
Eligible employer plan. An eligible employer plan is a qualified
employer plan (as defined in section 4972(d)) with at least one
employee eligible to participate who is not a highly compensated
employee. All eligible employer plans of the same employer are
treated as one eligible employer plan.
First credit year. The first credit year generally is your tax year that
includes the date that the eligible employer plan becomes effective.
However, you may elect to have the preceding tax year be the first
credit year, and claim the credit for qualified startup costs paid or
incurred during that tax year. For example, a calendar-year eligible
small employer whose eligible plan is first effective on January 1,
2007, may elect to treat 2006 as the first credit year and claim the
credit on its 2006 tax return for qualified startup costs incurred in
2006.

No Deduction Allowed for Credit Amount
You must reduce your otherwise allowable deduction for startup
costs by the credit amount on line 2.

For Paperwork Reduction Act Notice, see instructions.

Attachment
Sequence No.

Attach to your tax return.

Add lines 2 and 3
Enter the smaller of line 4 or $500. Partnerships and S corporations, report this amount on
Schedule K; all others report this amount on the applicable line of Form 3800, (e.g., line 1m of
the 2006 Form 3800)

Purpose of Form

OMB No. 1545-1810

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O.K. to print

Qualified startup costs incurred during the tax year. Do not enter more
1
than $1,000
Enter one-half of line 1
Credit for small employer pension plan startup costs from partnerships and S corporations

General Instructions

Date

All persons treated as a single employer under section 52(a), 52(b),
414(m), or 414(o) are treated as one person for purposes of the
credit. If the group qualifies as an eligible small employer, the group
member with the greatest startup costs figures the group credit on
lines 1 and 2 and skips the rest of the form. On separate Forms
8881, each member skips line 1 and enters its share of the group
credit on line 2. Each member then completes the remaining
applicable lines on its separate Form 8881 (and Form 3800, if
required). Each member must also attach a statement showing how
the group credit was divided among all members. The members
share the credit in the same proportion as they contributed qualified
startup costs.

What’s New
● The tax liability limit is no longer figured on this form. Instead, it
must be figured on Form 3800, General Business Credit.
● Taxpayers that are not partnerships or S corporations, and whose
only source of this credit is from those pass-through entities, are not
required to complete or file this form. Instead, they can report this
credit directly on line 1m of Form 3800.
● The IRS will revise this December 2006 version of the form only
when necessary. Continue to use this version for tax years beginning
after 2005 until a new revision is issued.
Paperwork Reduction Act Notice. We ask for the information on
this form to carry out the Internal Revenue laws of the United States.
You are required to give us the information. We need it to ensure
that you are complying with these laws and to allow us to figure and
collect the right amount of tax.
You are not required to provide the information requested on a
form that is subject to the Paperwork Reduction Act unless the form
displays a valid OMB control number. Books or records relating to a
form or its instructions must be retained as long as their contents
may become material in the administration of any Internal Revenue
law. Generally, tax returns and return information are confidential, as
required by section 6103.
The time needed to complete and file this form will vary depending
on individual circumstances. The estimated burden for individual
taxpayers filing this form is approved under OMB control number
1545-0074 and is included in the estimates shown in the instructions
for their individual income tax return. The estimated burden for all
other taxpayers who file this form is shown below.
Recordkeeping
5 hr., 58 min.
Learning about the law or the form
53 min.
Preparing and sending the form to the IRS

1 hr., 1 min.

If you have comments concerning the accuracy of these time
estimates or suggestions for making this form simpler, we would be
happy to hear from you. See the instructions for the tax return with
which this form is filed.

Cat. No. 33435N

Printed on recycled paper

Form

8881

(Rev. 12-2006)