Key takeaways:
- Tax deductions help restaurants save money by lowering taxable income.
- Tax credits further reduce a business’s tax bill.
- Smart tax planning ensures compliance and maximizes savings.
Taxes can limit your restaurant’s profit, making it harder to save and grow. However, tax deductions help reduce the burden. Every dollar you deduct means more money to reinvest in your restaurant business.
To help illustrate its benefits, we’ve outlined the most valuable deductions for small business owners. But first, let’s break down what tax deductions are and how they work.
Disclaimer: This article is for informational purposes only and should not be treated as tax advice. This primarily covers federal tax deductions, and state and local tax laws may have their own rules regarding labor-related deductions. Please consult a tax professional for your specific use case.
Understanding restaurant tax deductions
Tax deductions lower the taxes a business has to pay. You can gain tax deductions through three ways:
- Home office deduction: Business owners who use part of their homes for business operations can claim a tax deduction.
- Business expenses: You can record expenses—directly related to running your business—and file them in your tax report to claim reductions.
- Depreciation: High-value items like vehicles and heavy machinery, whose value decreases over time, can provide tax reductions over several years.
For example, if your business earns $100,000 a year but spends $40,000 on expenses like food, wages, and rent, you pay taxes as if you earned $60,000 instead.
To make the most of this, it’s important to know all the tax deductions your restaurant qualifies for. Here are some common sources of tax write-offs.
Labor and employee-related deductions
Labor costs
Employee wages are one of the largest expenses for restaurant owners, but they also come with meaningful tax deductions.
Most employee-related costs are deductible, including:
- Employee wages
- Overtime pay and bonuses
- Payroll taxes
- Benefits such as health insurance and retirement contributions
Independent contractors count too. Fees paid to contractors are deductible, and if you pay an individual more than $600 during the tax year, you’ll need to file Form 1099 for non-employee compensation.
Employee meals
Meals provided to employees during their shifts can be written off. In most cases, meals are 50% deductible, though certain situations allow for a full deduction.
Meals may qualify for 100% deductibility when they are provided for:
- Company events, such as holiday or staff appreciation parties
- Promotional or marketing-related activities
On the other hand, certain meals cannot be deductible:
- Meals provided “at the convenience of the employer,” such as during forced overtime
- On-site cafeteria meals
- De minimis benefits, such as coffee and snacks
Operational and overhead costs
Operating costs
Restaurants incur daily operating expenses, and those costs add up quickly. Many of them are fully deductible, including:
- Rent and utilities
- Office supplies
- Software and subscriptions
- Marketing and advertising
Software costs
Software plays a central role in modern restaurant operations, from order processing to financial tracking. These costs are deductible and can help reduce your overall tax liability.
Common deductible software expenses include:
- Point-of-sale systems
- Accounting and bookkeeping software
- Reservation and scheduling tools
Whether paid monthly or as a one-time fee, business software costs can typically be written off.
Advertising expenses
Money spent promoting your restaurant is fully deductible.
For example, launching a successful website requires advertising fees such as search, social, and display ads. All of these qualify as deductible business expenses.
Traditional marketing also counts. Printing menus, designing flyers, and updating signage are all eligible deductions.
Insurance
Self-employed restaurant owners can deduct 100% of qualifying insurance premiums from gross income. Deductible insurance types may include:
- Property insurance
- Liability insurance
- Workers’ compensation
- Business interruption insurance
Professional services
Running a restaurant often requires outside expertise. Fees paid to professionals such as accountants, attorneys, and consultants are deductible business expenses, even though they can be costly.
For example, you can avail yourself of our professional services to build your website while writing it off as a business expense to reduce your tax liability.
Equipment, inventory, and transportation
Cost of Goods Sold (COGS)
COGS includes the direct costs of preparing the food you sell. This typically covers raw ingredients, beverages, cooking supplies, and packaging. Because these expenses directly affect revenue, they are fully deductible.
Equipment expenses
Restaurants rely on major equipment such as ovens, refrigerators, and stoves. These purchases can be deducted in one of two ways.
Full deduction
Under IRS Section 179, qualifying equipment may be deducted in full during the year it is purchased and placed into service. To qualify:
- The equipment must be used for business.
- It must be purchased and used in the same tax year.
- It cannot be purchased from a related party.
Depreciation
For larger purchases, you may spread the deduction over several years. This approach provides tax benefits over the equipment’s useful life.
Maintenance and repairs
Routine maintenance and repairs that keep your restaurant operating efficiently are deductible.
However, major improvements such as remodeling or installing a walk-in freezer are considered capital expenditures. These costs must be deducted over time through depreciation rather than written off immediately.
Transportation costs
Vehicles used for business purposes may qualify for deductions.
If a vehicle is used exclusively for business, you may deduct using the standard mileage rate or through the actual expense method. If it’s used for both personal and business purposes, only the business portion is deductible.
Eligible transportation expenses include:
- Mileage
- Fuel
- Maintenance
- Insurance
Additional deductions and credits
Charitable donations
Participating in charity events can benefit both your community and your tax return. Donations are deductible if they are made to IRS-recognized, tax-exempt organizations. Always confirm the organization’s status before donating.
Entertainment expenses
Business-related entertainment is non-deductible even when it directly supports your operations. However, business meals can be 50% deductible if properly documented.
For example, meals with investors or suppliers, as well as team-building, can qualify. But entertainment itself, such as attending a sporting event with investors, employees attending a show, or visiting a park for team-building, cannot be written off.
The rules for writing off meal expenses still apply. Itemized documentation will let you take advantage of the 50% write-off.
Qualified Business Income Deduction (QBID)
After deducting your business expenses, you may still qualify for the Qualified Business Income Deduction.
QBID allows eligible restaurant owners to deduct up to 20% of remaining business income. Unlike standard deductions, this reduces taxable profit rather than business expenses.
Eligibility depends on your business structure. Pass-through entities such as sole proprietorships, partnerships, and S corporations may qualify. The final deduction amount varies based on income level, so working with a tax professional is strongly recommended.
Tax credits that can reduce your tax bill further
Tax credits can provide additional relief on top of tax write-offs. Here are two common tax credits that restaurant owners can avail themselves of.
Work Opportunity Tax Credit (WOTC)
The Work Opportunity Tax Credit helps restaurant owners reduce hiring costs by rewarding them for employing individuals from certain eligible groups.
If you hire an employee who’s qualified, you may receive a federal tax credit based on a percentage of that employee’s first-year wages. Eligible groups often include veterans, individuals receiving government assistance, formerly incarcerated individuals, and long-term unemployed workers.
To qualify, you must submit certification forms shortly after the employee is hired. Missing this deadline can disqualify the credit, which is why many restaurant owners rely on payroll providers or tax professionals to manage the process.
Beyond the tax savings, WOTC helps offset onboarding and training costs while supporting workforce inclusion. For restaurants with high turnover, it can be a valuable part of a long-term hiring strategy.
Example:
If you hire a qualifying employee who works at least 400 hours during the year and earns $10,000 in wages, you could claim a tax credit worth several thousand dollars for that single hire. For restaurants with frequent hiring needs, these credits can add up quickly.
FICA Tip Credit
The FICA Tip Credit allows restaurants to recover a portion of the payroll taxes they pay on employee tips.
Although tips are paid by customers, employers must still pay Social Security and Medicare taxes on reported tip income. The FICA Tip Credit lets you claim a dollar-for-dollar tax credit for the employer-paid portion of these taxes on tips that exceed the federal minimum wage.
This credit applies only to tips above the federal minimum wage, not higher state or local wage requirements. Even so, for restaurants with tipped staff, the savings can be substantial over the course of a year.
Accurate tip reporting and payroll records are essential. Proper documentation ensures the credit is calculated correctly and helps support your claim if the IRS requests verification.
Example:
If a server earns $5,000 in tips that bring their wages above the federal minimum wage, and you pay payroll taxes on that amount, you may be able to claim those employer-paid taxes as a credit on your tax return. Unlike a deduction, this credit directly reduces the taxes you owe.
How to keep accurate tax records and stay audit-ready
Good recordkeeping supports accurate filings, lowers audit risk, and gives you better visibility into your restaurant’s finances.
- Use accounting software consistently: Track income and expenses weekly or daily rather than waiting until tax season.
- Separate business and personal finances: Use a dedicated business bank account and credit card for restaurant expenses only.
- Keep detailed receipts and documentation: Save receipts that show the date, amount, vendor, and business purpose of each expense.
- Track tips and payroll carefully: Ensure employees report tips accurately and that payroll records match those reports.
- Review financial records regularly: Practicing monthly reviews helps catch errors early, confirm expenses are categorized correctly, and reduce last-minute stress during tax filing.
- Retain records for the appropriate timeframe: Keep tax records for at least three years, and longer for depreciation schedules, equipment purchases, or major improvements.
- Work with a tax professional: Hiring a qualified tax advisor can help ensure compliance, identify overlooked deductions or credits, and guide you through audits if necessary.
Audit red flags to avoid
Certain patterns can increase the likelihood of an IRS audit. Avoiding these common issues can help protect your business.
- Mixing personal and business expenses: Paying personal costs from business accounts without proper documentation raises questions about legitimacy.
- Missing or incomplete receipts: Claiming deductions without supporting documentation may be voided, even if the expense was legitimate.
- Inconsistent income reporting: Recording large discrepancies between reported income, POS records, and bank deposits may trigger further review.
- Overstated deductions: Claiming unusually high deductions compared to similar restaurants or prior years may attract attention.
- Poor tip reporting: Declaring inaccurate or inconsistent tips can raise payroll tax concerns and jeopardize credits.
- Late or incorrect filings: Incurring repeated errors, late submissions, or amended returns may signal compliance issues.
Keep more of what you earn
Smart tax planning is about more than filing on time. When you understand which deductions and credits apply to your restaurant and keep your records organized year-round, you put yourself in a stronger position to manage costs, protect your business, and reinvest with confidence.
As your restaurant grows, having the right support matters beyond your finances. A strong online presence can help you attract customers, share your story, and stay competitive. At Network Solutions, we help you build and manage your online presence at your own pace (or have it done for you), with support when you need it.
