Most restaurateurs know about the Federal Tip Credit also known as the FICA credit. Restaurant owners can claim a credit on their federal income tax return for the amount of federal payroll tax, i.e. the FICA tax they paid on employee’s tips that are reported on the employees’ Form W-2. Up until 2007, the credit was subject to the Alternative Minimum Tax (AMT) limitation. The Small Business and Work Opportunity Tax Act of 2007 eliminated the AMT limitation thus allowing more restaurant owners to benefit from the credit. The credit can be used to offset current year income tax. Any unused portion can be carried back one year and forward 20 years.

Small Business Jobs Act of 2010 – Making the credit even more attractive
For one year only, eligible small business (ESB) can carry back any unused FICA credit that is generated in 2010 for 5 years. An ESB is a corporation, partnership or sole proprietorship with average annual gross receipts not exceeding $50 million for the preceding three years. Since business credits are used on the first-in-first-out basis, businesses that have FICA credit carryovers from 2009 and prior years can still benefit from this provision.

For example: Assume the following facts:

The 2010 tax liability of $7,000 is offset by the FICA credit carried over from prior years leaving $3,000 to be carried over to 2011. The FICA credit generated in 2010 of $12,000 can be carried back to years 2005 to 2007 generating refunds totaling $12,000 from those years.

Carrying back the credit to claim a refund is not that difficult. An eligible business can either file a tentative refund claim on Form 1139 or Form 1045, whichever is applicable; or file an amended return for the prior year(s) from which the refund is generated. A tentative refund claim, in general, is processed faster than an amended return; however, a tentative refund claim has to be filed within twelve months from the end of the tax year in which the unused credit arises. Hence, for businesses that are on a calendar-year basis, the tentative refund claim has to be filed by December 31, 2011.

Remember, this is only available for credits generated and claimed for the taxable year beginning after December 31, 2009. Calendar-year businesses that have yet to file their tax returns for 2010 do not miss out on this opportunity to claim the credit and obtain a refund for taxes paid in prior year(s). For those who have already filed their 2010 tax returns, consider filing an amended return to claim the credit and carry it back.

Author: So Sum Lee, Tax Manager