7 Tax Deductions That Restaurant Owners Can Claim
There are multiple tax deductions and a couple of tax credits that restaurant owners can take when it comes time to file their tax returns. These deductions can reduce their taxable income significantly—saving thousands of dollars in federal tax.
To take a tax deduction correctly, the amount claimed must be necessary, reasonable, and ordinary, and be supported by written receipts. Keeping proper records will ensure you can take all of the tax deductions that you're eligible for.
Top 7 Restaurant Tax Deductions
Restaurants—defined as businesses that serve food and beverages for immediate consumption—face a large number of regular business expenses in the course of their work. The complexity of these expenses makes restaurant accounting services and meticulous bookkeeping essential.
When tax season comes around, strategic tax planning and proper bookkeeping will ensure that you'll be able to prove your actual business expenses and deduct them on your federal income tax return to reduce your tax liability.
Operating Expenses
All of your restaurant's operating costs are deductible on your tax return. This includes:
The cost of your restaurant’s property rental or lease, mortgage interest, or depreciation if you own your restaurant outright
The cost of kitchen equipment and property improvements
The cost of furniture, tablecloths, plates, bowls, cups, and eating utensils
The cost of take-out containers and napkins
Food costs, also referred to as cost of goods sold (COGS)
The wholesale cost of items that you offer to retail customers for sale, such as branded coffee mugs and cookbooks
Employee pay and benefits such as vacation pay, contributions to retirement accounts, employee gifts up to $25 per employee per year, and employee meals that are eaten on-site
Professional licenses, such as food handling licenses
Fees for professional services, such as accounting, software, payment processing, and legal fees
Office supplies
Work uniforms
Liability insurance
Business vehicle rental, lease, loan interest, or depreciation if the vehicle is used for work (deliveries and grocery shopping) at least 50% of the time.
Business-related mileage for deliveries and grocery shopping (not commuting mileage), using the standard mileage or actual cost method
Maintenance expenses
Marketing and advertising expenses
A note about tips: Tips given to individual wait staff are counted as taxable income and must be reported on each waiter or waitress's tax return.
Tax Credits
Restaurant owners who employ certified members of targeted groups are eligible for the Work Opportunity Tax Credit (WOTC). This credit is usually equal to 40% of the employee's first-year wages up to a limit of $6,000 per employee.
Under section 51 of the Code, employers may claim the WOTC for first-year employees who are:
Ex-prisoners
Veterans
Rehabilitation program graduates
Residents of empowerment zones or rural renewal counties
Recipients of state assistance under part A of title IV of the Social Security Act (SSA)
Supplemental nutrition assistance program (SNAP) recipients
Supplemental security income benefit recipients
Individuals who have experienced long-term unemployment
Small business owners (not corporations) may also be eligible for the Qualified Business Income Deduction (QBID). This deduction allows restaurant owners to deduct up to 20% of their net income and up to 20% of income from an investment real estate property.
Other Tax Deductions for Restaurant Owners
In addition to the tax deductions and tax credits mentioned above, there are a few other tax deductions that restaurant owners can take.
Operating losses. Restaurant owners can claim operating losses from previous tax years against their income from the current tax year.
Self-employment tax. Restaurant owners who pay self-employment tax can deduct 50% of the tax paid (which would correspond to the employer contribution) on their business income tax return.
Retirement and health savings account contributions. Restaurant owners can deduct eligible contributions that they made to a retirement or health savings account during the tax year.
State and local taxes. Restaurant owners can deduct any state and local taxes their business paid during the applicable tax year. Unincorporated restaurants located in Jacksonville, Florida, for example, will be able to claim property taxes but won’t claim state income taxes because Florida doesn’t charge its residents any income tax.
Charitable donations. Restaurants can write off charitable donations given in the form of cash and free food to eligible charitable organizations. Make sure that you consult with your local municipality regarding health laws before donating cooked or uncooked food.
Advice for Optimizing Your Restaurant Tax Deductions
Tax deductions can reduce your taxable income significantly, but you could be penalized if you claim excessive deductions or can't substantiate the figures on your tax return. For maximum gain without incurring penalties:
Classify restaurant staff correctly with W-2 forms for all salaried staff. Classifying workers as independent contractors and failing to withhold payroll taxes for these workers can lead to expensive fines.
Keep records of everything you spend and update the books daily.
Hire a small business tax professional to help you with tax planning services and tax return preparation. Remember, as necessary professional services, these costs are tax-deductible too.
Optimize Your Restaurant Deductions with the Help of a Tax Professional
Small business tax laws and tax credits are constantly being updated, making it essential to consult with a tax professional about which deductions and credits you can claim on your tax return and the limits that apply to these deductions and credits in any given tax year.
If you've gotten behind on your taxes or realize you need to amend a previous tax return, it's better to do so sooner rather than later. A small business accountant can help you catch up on unfiled tax returns and get you back on track to take full advantage of the deductions and credits available to you.
