The 2007 Small Business and Work Opportunity Act of 2007 signed by President Bush on May 25, 2007, waives the limitation on the use of the FICA Tip Credit against Alternative Minimum Tax.
Many restaurant operators are aware of the federal FICA Tip Credit, a credit given to taxpayers (with tipped employees) equal to the FICA (Social Security and Medicare) payroll taxes paid by an employer on the tips reported by their employees.
Until now, many taxpayers could not benefit from the old law because the FICA Tip Credit did not reduce a taxpayers’ Alternative Minimum Tax. Effective for tax years beginning after December 31, 2006, the FICA Tip Credit and the Work Opportunity Tax Credit (WOTC) are now available to offset both regular and alternative minimum tax.
Consider the following example that illustrates the impact of the change in the law:
| Credit Calculation: | ||
| Total Tips Reported by Employees |
$300,000
|
|
| FICA Tip Tax Rate |
7.65%
|
|
| FICA Tip Tax Credit |
$22,950
|
|
| Credit Utilization: | ||
| Regular Tax |
$250,000
|
|
| Alternative Minimum Tax |
$245,000
|
|
| Excess Regular Tax Over AMT |
$5,000
|
|
| Benefit to Taxpayer: | ||
| Tip Credit Used (Under New Law) |
$22,950
|
|
| Tip Credit Used (Under Old Law) |
$5,000
|
|
| Increased Benefit to Taxpayer |
$17,950
|
Under the old law, the taxpayer could only use $5,000 of FICA Tip Credit to reduce their regular tax down to the amount of minimum tax due. Under the new law, the taxpayer is entitled to reduce both regular tax and alternative minimum tax for a total savings of $22,950 (an additional savings of $17,950).[1]
2007 Planning Opportunity:
Don’t wait to file your 2007 tax return to implement the benefits of this change in the law. You may be entitled to reduce your quarterly estimated taxes now. Quarterly estimated taxes are due April 15, June 15, September 15 and January 15, 2008. By addressing the impact of this law change now, you can reduce the payments you are scheduled to make.
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[1] Other limitations and adjustments were not considered in this example for the sake of simplicity. The example is meant to provide an idea of the difference in the old law and the new law. Consult your tax advisor as to the impact in your tax situation.