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 take a big bite of your restaurant’s profit, making it harder to save and grow. Thankfully, tax deductions are here to save restaurant owners from stress. Every dollar you deduct means more money to reinvest in your restaurant business.
To make things easier, 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
A business’s tax deduction is the expense that lowers the amount of income subject to taxation. In simple terms, it helps you pay less taxes.
Here’s how it works. If your business earns $100,000 a year but spends $40,000 on expenses like food, wages, and rent, you only pay taxes on the remaining $60,000.
To make the most of this, it’s important to know all the tax deductions your restaurant qualifies for. Let’s take a look at them.
Labor & employee-related deductions
1. Labor costs
Employee wages are one of the largest expenses for restaurant owners, but the good news is they come with valuable tax deductions.
Any expenses a business puts into their employees are deductible, including:
- Employee’s wages
- Overtime pays and bonuses
- Payroll taxes
- Benefits like health insurance and retirement contributions
What about independent contractors? You can also deduct their fees from your tax. If you pay them more than $600 during the tax year, you’ll need to file a Form 1099 or a non-employee compensation.
2. Employee meals
If you provide meals to your employees during their shifts, you can deduct these costs from your tax. Generally, meals are 50% deductible, but certain exceptions allow for a 100% deduction (such as the relief measure during COVID).
Meal expenses qualify for full deduction if they are (but not limited to):
- Company event meals (e.g., holiday parties, summer party)
- Meals during promotional periods.
Operational and overhead costs
3. Operating costs
Since restaurants operate daily, they also spend money daily. Costs can add up faster than a lunch rush. Fortunately, many operating expenses are tax deductible. What are these?
- Rent and utilities
- Office Supplies
- Software
- Subscriptions
- Marketing and advertising
4. Software costs
Software plays a big role in running a restaurant, from taking orders to tracking expenses. It also helps lower your tax liability.
If you pay a monthly subscription or a one-time fee for business software, you can write it off. Common deductible software expenses include:
- Point-of-sale systems
- Accounting software
- Reservation and scheduling tools
5. Advertising expenses
Yes, the money you spend to promote your restaurant is fully deductible.
For example, if you’re launching a new website for your restaurant, the cost to register a domain, design the site, and run paid ads all count as tax-deductible business expenses.
If you’re fond of traditional marketing, you’re covered, too. Printing menus, designing flyers, and even updating your restaurant’s signage all qualify as deductions.
6. Insurance
The IRS lets self-employed individuals deduct 100% of insurance premiums directly from their gross income. Here are some types of insurance that you can write off:
- Property insurance
- Liability insurance
- Worker’s compensation
- Business interruption insurance
7. Professional services
Running a business isn’t a one-person job. Small business owners often hire experts to handle things beyond their capabilities. While professionals like lawyers, accountants, and consultants are costly, their fees are taxable.
Equipment maintenance and transportation
8. Cost of Goods Sold (COGS)
COGS includes everything you spend on supplies to prepare the food you sell, including raw ingredients, beverages, cooking supplies, and packaging. Since these costs directly impact your restaurant’s revenue, they’re fully deductible.
9. Equipment expenses
Restaurants rely on equipment like ovens, stoves, and refrigerators. That is why you need to know which equipment is deductible.
There are two ways to do this:
Full deduction
According to IRS Section 179, you can deduct the entire cost of equipment during the year of its purchase, that is, if it qualifies. To qualify, equipment must meet the following:
- You use it for business
- It’s a physical item
- You buy and use it in the same year
- You didn’t buy it from a related party or family
Depreciation
For bigger purchases, like stoves and freezers, you can spread the deduction over several years. This method provides long-term tax benefits.
10. Maintenance and repairs
Keeping your restaurant in good shape is best for your business, performance-wise and financial-wise. The IRS lets you deduct maintenance and repair costs as long as they keep your restaurant running.
It’s also important to note that major upgrades, like remodeling or installing a walk-in freezer, don’t count. These are capital expenditures that you need to deduct over time through depreciation based on their lifespan.
11. Transportation costs
Using a vehicle for your restaurant can lower your tax bill.
To get a full auto deduction, ensure the vehicle is only for business. If it’s for personal and business use, you can only deduct the business portion.
Here are certain expenses that you can deduct.
- Mileage
- Fuel
- Maintenance
- Insurance
Others
12. Charitable donations
Giving to charity is good for your community and your taxes. The IRS allows you to deduct donations from your taxable income, but only if it’s to a registered or IRS-recognized organization. Before donating, ensure the charity qualifies for tax-exempt status.
13. Entertainment expenses
Meeting with investors and suppliers over a meal? If they relate to your business, those costs may be deductible.
Team-building activities are also deductible. If they help your staff work better together, you can write them off.
Here’s a key tip: keep records. The IRS needs proof that the expense directly benefits your business.
14. General business income
After deducting all your business expenses, you could still qualify for one last tax break, the Qualified Business Income Deduction (QBID).
Unlike regular deductions from your business’s expenses, the QBID is an extra deduction that applies after you have deducted your expenses.
The QBID lets qualified restaurant owners deduct up to 20% of their remaining business income before paying taxes. Instead of lowering income by subtracting costs, QBID cuts down the taxable profit itself.
However, not everyone is eligible. To qualify, your restaurant must be a pass-through business, like a sole proprietorship, partnership, or S-corp. The exact deduction depends on how much profit you make and your total taxable income.
Some might find this last one complicated, so we suggest consulting a tax expert.
Tax credits that can save you even more
Taxes are still high? Tax credits can help take your tax deduction further. Here are two tax credits that restaurant owners should know about.
Work Opportunity Tax Credit (WOTC)
The WOTC applies to restaurants that hire employees from certain groups, such as veterans or individuals receiving government assistance. The amount varies depending on the employee’s hourly wage.
Federal Insurance Contributions Act (FICA) Tip Credit
If your employees receive tips, you’re required to pay payroll taxes on them. The FICA Tip Credit helps you get back some of the taxes you’ve paid on those tips. However, this applies only to tips that bring an employee’s wages above the federal minimum wage.
How to Keep Accurate Tax Records and Stay Audit-Proof
Staying organized makes tax time less stressful. It also helps you avoid IRS penalties. To ensure accurate tax records during tax season, here are some best practices you can follow:
- Use accounting tools to track expenses and income.
- Separate personal and business bank accounts and credit cards.
- File receipts and documents by month or expense type.
- Update your record regularly.
- Consult a professional to ensure you follow current tax laws.
Keep more of your hard-earned money
Smart tax planning goes a long way. By maximizing deductions and staying organized, you can reduce your tax burden and reinvest those savings back into your restaurant.
Looking to grow your restaurant’s online presence? Network Solutions can help you build your website (or have it done for you) to attract customers and grow your business. Visit Network Solutions to learn more.
