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National Restaurant Association - 45(B) tax credit helps restaurants reduce federal income taxes

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45(B) tax credit helps restaurants reduce federal income taxes

With tax season in full swing, keep in mind that if you employ tipped workers, you may be eligible to claim a federal income tax credit for the FICA (Social Security and Medicare) taxes you pay on a portion of your employees' tips.

The so-called 45(B) credit, named after a section of the federal Internal Revenue Code, is a "general business credit" that lets restaurateurs reduce their federal income taxes by the amount of FICA taxes they pay on certain employee tips. Congress established the credit in 1993 at the urging of the National Restaurant Association.

The 45(B) credit applies to employers who operate a food or beverage establishment where tipping is customary and where food or beverages are served for either on- or off-premises consumption.

To calculate and claim the credit, businesses fill out IRS Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips, and file it with their federal income tax return.

The 45(B) credit is open to all restaurateurs but with some limitations. An experienced accountant can help restaurateurs of all sizes understand how to take advantage of the credit. You should be aware of the following:

• You must owe federal income taxes to claim the credit. Because you can use the 45(B) credit only to the extent your company owes federal income taxes, there may be some restaurateurs who cannot take advantage of the credit. This would include operators who break even or lose money, and thus have no taxable income. However, with some limitations even operators without federal income tax liability in a particular year may carry the credit back or forward to a year in which they owed, or will owe, federal income taxes.

• You may not claim both a credit and deduction. Restaurateurs who take the 45(B) credit may not deduct those same FICA taxes as a business expense.

• Businesses that file under the Alternative Minimum Tax (AMT) system typically are not able to take advantage of most tax credits and deductions. However, Congress included in its 2007 minimum wage bill a provision to allow both individual and corporate AMT filers to use any or all of the 45(B) tax credit to offset their AMT liability. Check with your tax advisor for details.

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