Major Restaurant Tax Credits You Can Claim
Understand the process for claiming federal tax credits that can lower your restaurant's tax liability, from required forms to final filing.
A tax credit offers a dollar-for-dollar reduction of your income tax liability. For the competitive restaurant industry, several federal tax credits are available that can directly boost your bottom line by lowering the amount of tax you owe. These credits are designed to reward businesses for specific activities, such as retaining employees or hiring individuals from certain demographics.
Credit for Social Security and Medicare Taxes Paid on Employee Tips
The Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips is a tax credit for food and beverage establishments. It allows employers to claim a credit on their share of FICA taxes paid on employees’ reported tip income. This applies to the 7.65% an employer pays for Social Security and Medicare taxes on tips that employees report, which is any amount over $20 per month.
To qualify, tips must be received by employees at a food and beverage establishment where tipping is a customary practice. The calculation has a specific nuance related to the minimum wage. The credit is only available for FICA taxes paid on tips that exceed the federal minimum wage rate of $5.15 per hour, which was the rate on January 1, 2007. Tips used to bring an employee’s hourly cash wage up to this $5.15 threshold are not eligible.
For example, if a restaurant pays a direct cash wage less than $5.15 per hour, the employer must determine the portion of tips needed to meet that rate for each employee. Only the FICA taxes paid on tips above that amount are eligible for the credit. If an employee is already paid a direct cash wage of $5.15 or more, then all reported tips are eligible for the credit calculation.
Work Opportunity Tax Credit
The Work Opportunity Tax Credit (WOTC) is a federal incentive for employers who hire and retain individuals from specific targeted groups that have historically faced barriers to employment. The credit is authorized through the end of 2025. It is a non-refundable credit applied against the business’s income tax liability.
Common targeted groups include qualified veterans, recipients of Supplemental Nutrition Assistance Program (SNAP) benefits, and long-term unemployment recipients. The value of the credit depends on the employee’s target group and the hours worked in the first year. The credit is 25% of qualified first-year wages for an employee who works at least 120 hours and 40% for one who works 400 or more hours.
The maximum credit can vary, but for many target groups, it is up to $2,400 per eligible employee. For certain groups, such as qualified veterans with service-related disabilities, the maximum credit can be higher, reaching up to $9,600. A requirement for claiming the WOTC is that the employer must obtain certification that the individual is a member of a targeted group.
Other Notable Tax Benefits for Restaurants
An enhanced deduction is available for the donation of food inventory under Internal Revenue Code Section 170. Restaurants that donate wholesome food to qualified nonprofit organizations can claim a deduction greater than the cost basis of the food. This deduction is allowed for up to 15% of the business’s net income.
A credit is also available for employers who provide paid family and medical leave under Internal Revenue Code Section 45S. This credit is for a percentage of the wages paid to qualifying employees while they are on family and medical leave. The employer must have a written policy in place that meets specific requirements regarding the rate of pay and leave offered.
The Employee Retention Credit (ERC) was a benefit related to the COVID-19 pandemic that has expired for current tax years. It is now only available through amended payroll tax returns for prior periods in 2020 and 2021. The IRS has implemented a moratorium on processing new claims filed after September 14, 2023, due to concerns about fraudulent filings, so businesses should consult a tax professional before filing a retroactive claim.
Information and Forms Needed to Claim Credits
Proper documentation is necessary to claim these tax benefits.
- To claim the FICA tip credit, a restaurant owner must have detailed payroll records of employee tips and use IRS Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips.
- For the Work Opportunity Tax Credit, the process begins at hiring by submitting IRS Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, to the state workforce agency within 28 days of the employee’s start date.
- For the enhanced food donation deduction, you must obtain a written acknowledgment from the recipient charity.
- For the paid family and medical leave credit, you need records of the leave paid and a copy of the written leave policy.
How to Claim the Credits
After gathering all necessary information and completing the specific forms, the final step is to claim the credits on your business’s annual income tax return. The amounts calculated on forms like Form 8846 and the total WOTC amount are transferred to Form 3800, General Business Credit, if applicable, and then onto your main tax return.
The individual credit forms, such as Form 8846 for the tip credit and Form 5884 for the WOTC, must be attached to your income tax return when it is filed with the IRS. Filing the return with these completed forms is the final action that formally requests the tax credit from the government.