Restaurant Owner Saves $94K with Cost Seg + FICA Tip Credit Stacking

The Problem

This client owned and operated two restaurant locations through an S-Corp, generating combined revenue of $4.2M with $480,000 in net income. The client also owned both restaurant buildings, purchased for a combined $1.8M. The buildings were being depreciated on standard 39-year straight-line schedules, producing only $40,200 per year in combined depreciation. The restaurants employed 62 tipped employees across both locations, but the client had never claimed the FICA Tip Credit under IRC §45B.

The FICA Tip Credit allows restaurant and hospitality employers to claim a dollar-for-dollar tax credit equal to the employer's share of FICA taxes (7.65%) paid on employee tips that exceed the federal minimum wage for tipped employees ($2.13/hour). With 62 tipped employees reporting a combined $1.1M in annual tips, the available FICA Tip Credit was substantial. The prior CPA had never mentioned it because many generalist CPAs are unfamiliar with industry-specific credits.

AE Tax Strategy

1. Cost Segregation on Two Restaurant Buildings Under IRC §168

We commissioned cost segregation studies on both restaurant buildings. Building 1 ($1.1M): $451,000 reclassified (41% — restaurants produce high reclassification due to specialized kitchen infrastructure, exhaust systems, decorative finishes, signage, and site improvements). Building 2 ($700,000): $280,000 reclassified (40%). Combined accelerated components: $731,000. Under 100% bonus depreciation, the entire amount was deductible in Year 1, producing $731,000 in accelerated deductions versus the $40,200 that straight-line depreciation would have provided.

2. FICA Tip Credit Under IRC §45B

We calculated the FICA Tip Credit for all 62 tipped employees. The credit equals the employer's FICA obligation (7.65%) on tips exceeding the amount that would bring each employee's cash wage to the federal minimum wage ($7.25/hour). With $1.1M in total reported tips across 62 employees, and after subtracting the tip credit against minimum wage, the qualifying tip amount was $860,000. The FICA Tip Credit was $860,000 x 7.65% = $65,790. This is a dollar-for-dollar credit against income tax liability, not merely a deduction.

3. Work Opportunity Tax Credit (WOTC) Under IRC §51

We also identified that 8 of the 62 employees qualified for the Work Opportunity Tax Credit (WOTC) under IRC §51 based on their membership in targeted groups (veterans, SNAP recipients, ex-felons). The WOTC provided an additional $28,000 in tax credits. Combined with the $65,790 FICA Tip Credit and the cost segregation deductions, the total Year 1 tax benefit was approximately $94,000 in ongoing annual savings (the FICA Tip Credit and WOTC are recurring credits, while the cost seg provides a one-time front-loading of deductions).

Before & After Comparison

Tax Category	Before	After	Savings
Cost Seg Year 1 Deduction Increase	$0	$690,800	$690,800
FICA Tip Credit (Annual)	$0	$65,790	$65,790
WOTC Credit (Annual)	$0	$28,000	$28,000
Combined Annual Tax Savings	$0	$94,000	$94,000
Total	$0	$94,000	$94,000

Key Takeaways

• Restaurant buildings produce among the highest cost segregation reclassification percentages (38-45%) because of specialized kitchen exhaust, grease traps, walk-in cooler infrastructure, decorative finishes, and extensive site improvements.
• The FICA Tip Credit under IRC §45B is one of the most underutilized tax credits available to restaurant owners — it provides a dollar-for-dollar credit, not just a deduction.
• WOTC screening should be integrated into the hiring process for all restaurant employees — qualifying candidates are common in the hospitality industry.
• Stacking cost segregation with the FICA Tip Credit and WOTC can produce six-figure annual tax savings for multi-location restaurant operators.