If you own a restaurant, you might prefer to focus on the menu rather than the accounting. But tax planning is a critical part of improving your bottom line, especially when you can find ways to save money. We’ve found the most interesting tax breaks for restaurateurs so you can find new ways to invest in your business without breaking the bank.
Whether it’s a brand new pizza oven, an upgrade to your POS system, or extra chairs for your restaurant, any investment in your equipment is completely tax-free for your restaurant, including any upgrades made with restaurant equipment financing.
In the past, you had to spread these small business tax deductions over the life of the asset, called depreciation. If the chair is expected to last for five years, you must divide the deduction evenly over that time. But today, the Section 179 tax deduction allows you to deduct the full cost of buying new equipment in one lump sum.
If you currently have a significant amount of taxable income, consider using the Section 179 deduction. If your restaurant is just starting out and very close to breaking even, it may be better to spread out these equipment tax deductions over time so you can save them in the future when taxes are higher.
You can also deduct any operating costs from your income each year. This includes:
- Cost of food, ingredients and beverages
- Supplies for your customers such as cutlery, plates and napkins
- Your cooking and restaurant supplies such as pots, pans, aprons and uniforms
- The cost of maintenance and upkeep, such as when you hire cleaning staff at the end of the day
- Rent or lease payments and utilities
- any marketing and advertising costs
For a restaurant, these costs can add up to a sizable small business Tax Deductions for Restaurants. But you need to keep organized records to claim all of these deductions in case the IRS audits you. To help track expenses, you can use a receipt scanning app like Expensify.
Employee wages, excluding tips
Whatever you pay an employee as compensation is tax-deductible. This includes their salary, bonuses and other fringe benefits. You can also deduct this fee if you give your waiter a free meal each shift.
However, your restaurant cannot deduct the value of tips provided to servers. The IRS thinks the money is going directly to the employee, not you. You’ll also want to keep track of how much your employees collect in tips to ensure that this amount, plus your base salary, is at least enough to get them minimum wage. According to our expert, if not, your restaurant must make up the pay difference.
If you provide food to customers or host an event, you have two options for deducting shipping costs. The easiest way is to keep track of your total mileage, as the IRS allows you to deduct a standard rate of 58 cents per mile driven. Alternatively, you can track all driving-related expenses (gas, tolls, vehicle wear, and tear, etc.) and report the total to the IRS. It’s a bit more complicated, but with more expensive cars, you can get a bigger deduction than using standard rates.
Donating food to charity can boost your profile in your local community while lowering your taxes. According to ReFED, your deduction will be equal to your cost basis (what you pay your suppliers for food) plus half your profit margin when you sell food at the restaurant. It’s to your advantage to use these Tax Deductions for Restaurateurs by working with an accountant or using tax software at your restaurant when you’re planning. Both options can help you save as much money as possible. Once you’ve paid your taxes, you can get back to more important things on your agenda, like identifying next week’s specials.