July 2018
An individual shareholder of an S corporation restaurant operator was
not allowed to claim FICA tip credits under Code Sec. 45B that the S
corporation did not claim. The shareholder could not unilaterally and
retroactively nullify the S corporation’s election to deduct FICA tip
taxes.
Background
The restaurants owned by the S corporation had hired “tipped employees”
whose earnings came partly from customer tips. The S corporation was
required to pay taxes on these tips as part of its FICA tax payments.
For the two tax years at issue, the S corporation did not claim any FICA
tip credits. Instead, the S corporation deducted its payments of the
FICA tip taxes on its Forms 1120S, and did not later amend those
returns.
On his amended Forms 1040 for those tax years, the shareholder claimed
he was entitled to flowthrough FICA tip credits with respect to his
interest in the S corporation.
FICA Tip Credit
Code Sec. 45B allows an employer working in the food and beverage
industry to claim business tax credits for the portion of the FICA
taxes—i.e., social security and Medicare taxes—that it paid on employee
tips in excess of the minimum wage. The employer must have employees who
receive tips from customers for providing food or beverages for
consumption, and must be deemed to have paid FICA taxes on the tips in
excess of the minimum wage. The employer must not have already claimed a
deduction for the FICA tax payment. An employer claims its FICA tip
credits on Form 8846.
Here, when the S corporation chose to deduct its FICA tax payments, it
had made an election not to claim any FICA tip credits. The S
corporation never claimed or intended to claim FICA tip credits. Based
on this reporting position, the shareholder was not entitled to any
flowthrough FICA tip credits for either tax year.
S Corporation Elections
Under Code Sec. 1363(c) and its regulations, elections that affect the
computation of items derived from an S corporation generally must be
made by the S corporation, not separately by its shareholders. There are
two exceptions: the shareholder claims any elections (1) for the
deduction and recapture of certain mining exploration expenditures, and
(2) for foreign tax credits.
In this case, the shareholder argued in effect that the S corporation’s
election to deduct FICA tax payments could be changed unilaterally by
his request, made in his capacity as a shareholder, that the S
corporation amend its returns to claim the FICA tip credit. The
shareholder’s position was rejected based on the plain text of Code Sec.
1363(c), and of Code Sec. 45B(d), which states that the credit does not
apply to a taxpayer if the taxpayer elects to have the credit provision
not apply.
Further, the Tax Court stated that it refused to create a new precedent
that would give each individual shareholder the power to change an S
corporation’s tax election unilaterally. Such a change, stated the
court, would not only affect the tax liabilities of the requesting
shareholder, but could also affect the tax liabilities of the
shareholders who have not consented to the change.