Claim Your Tax Credit
November/December 2007
By Robert Wagner, CPA
NetFinancials, Inc.
Earth-shaking changes in the tax laws impacting restaurants happen once a decade. The Small Business and Work Opportunity Tax Act is the latest “Law of the Decade” signed by the President on May 25 2007. That’s when Congress increased the minimum wage.
Congress and the restaurant lobby in Washington reached a compromise to get the minimum wage changed. The restaurant lobby would not actively oppose the minimum wage increase if certain targeted tax relief was included for the restaurant industry. It was a win-win. Congress got to crow about raising the minimum wage and restaurants got newly extended and expanded tax credits to “ease the pain” of paying higher wages.
The changes in the tax law are targeted at small to mid-sized restaurant operators. So if you’re a restaurant operator with restaurants in an “S” corporation or a limited liability company (LLC), most of the restaurants in the Georgia market, then you are a winner. Time to celebrate! Crack open the bubbly! The largest restaurant companies, the big corporate operators, generally do not benefit from the law change.
Do you benefit from the law change? Answer “yes!” to the following, and you just won the income tax lottery:
- Is your restaurant in an “S” corporation or an LLC?
- Does your restaurant employ tipped servers?
- Do your servers report their tips?
“Yes” means you can claim a tax credit for payroll taxes you pay on servers’ tips. All you have to do to get the tax credit is:
- Be absolutely certain your payroll service company is tracking your FICA tip credit
- Give your FICA tip credit report to your tax preparer and ask them to complete Form 8846 as part of the restaurant’s 2007 income tax return
Your first call should be to your payroll company to ensure you can get a FICA tip credit report at year end. Most track FICA but some do not. Next, call your tax preparer to be sure they know you want to claim the FICA tip credit in 2007.
A study of local Atlanta restaurants determined the following for the average casual/fine dining restaurant operator:
- On average each could claim a FICA tip credit equal to $6,000 for each $1 million in total restaurant revenue.
- A restaurant with $3 million in revenue could claim around $18,000 in income tax credits!
- The higher the servers’ reported tip rate, the higher the tax credit.
- One Atlanta restaurant with very high tip rates claimed tax credits in 2006 equal to $12 thousand per $1 million in revenue.
- Wow!
Here’s the Small Print
The 1993 FICA tip or 45(B) tax credit is calculated at the company level and is then passed through to the operator to be used on the operator’s tax return. But the tax credit was made nearly useless to operators by the dreaded alternative minimum credit or AMT. We calculate that upwards of 90% of operators could not use the FICA tip credit on their personal tax returns due to the AMT. The 2007 tax law changes everything! Beginning January 2007 the FICA tip credit is no longer limited by the AMT. That means many restaurant operators will have their ENTIRE INCOME TAX LIABILITY WIPED OUT by the FICA tip credit in 2007. This is the biggest tax law change in years!
It Gets Better
The same May 25 tax law extended and modified the work opportunity tax credit (WOTC). The WOTC gives operators a tax credit up to 40% of the first $6 thousand of wages paid to certain disadvantaged employees. Such employees include certain veterans, ex-felons, high-risk youth, and food stamp recipients. There are certain minimum employment and registration requirements. In most cases, the restaurant operator will want to use an outside specialist to administer the company program.
As in the FICA tip credit case, the WOTC was limited by the AMT but that limit was removed by the May 25 tax law change.
Higher Depreciation Limit
Small business expensing lets restaurants legally write-off assets such as furniture, fixtures and equipment purchased for business use. In 2007 the amount of assets that could be expensed was to rise to $112,000. Congress upped the limit. Now restaurants can write off up to $125,000 of qualified assets acquired in any one year. Like so many tax laws, this benefit phases out. If within a year the restaurant company purchases qualifying assets worth more than $500 thousand, this tax benefit starts phasing out.
A major, new tax benefit for casual/fine-dining restaurant operators was enacted by Congress in May 2007. The source was a grand bargain struck to get the minimum wage passed. To retain good workers, casual dining stores already pay rates higher than the minimum wage. So in 2007 casual dining restaurants got major, targeted tax relief even though they did not face higher costs from the minimum wage increase. Is this a great county or what!
