If you own a restaurant, chances are you’d rather focus on the menu than your accounting statements. But planning taxes is a key part of improving your bottom line, especially when you can find ways to save money. We’ve tracked down the most intriguing tax deductions for restaurant owners so you can find new ways to invest in your business without sweating the bill.
Equipment
Whether it’s a brand-new pizza oven, an upgrade to your POS system, or extra chairs for your dining room, any investment in your equipment is fully tax-deductible for your restaurant, including any upgrades made using restaurant equipment financing.
In the past, you had to spread these small business tax deductions over the useful life of an asset, called depreciation. If a chair was expected to last five years, you had to spread the deduction equally over that time. But today, the Section 179 tax deduction allows you to deduct the entire cost of buying new equipment all at once.
If you have a fair amount of taxable income right now, consider using the Section 179 deduction. If your restaurant is just starting out and pretty close to breaking even, it may be better to spread these equipment tax breaks over time so you can save them when your future taxes are higher.
Operating Expenses
You are also able to deduct any operating costs from your revenue each year. This includes:
- The cost of food, ingredients and beverages
- Supplies for your customers, like utensils, plates and napkins
- Your cooking and restaurant supplies, like pots, pans, aprons and uniforms
- The cost of maintenance and upkeep, like if you hire a cleaning crew at the end of the day
- Rent or lease payments and utilities
- The cost of any marketing and advertising
- Insurance premiums
For a restaurant, these expenses can add up to sizable small business tax deductions. But you need to keep organized records to claim all these deductions, just in case the IRS audits you. For help tracking expenses, you could use a receipt scanning app like Expensify.
Employee Wages, Excluding Tips
Whatever you pay employees as compensation is tax-deductible. This includes their salaries, bonuses and other fringe benefits. If you give your servers a free meal every shift, you can deduct that cost as well.
However, your restaurant cannot deduct the value of tips given to your servers. The IRS considers that the money went directly to the employee and didn’t come from you.
You also need to track how much money employees are collecting in tips to make sure that this amount, plus your base salary, is enough to at least get them to minimum wage. If not, your restaurant must make up the difference in salary, according to NOLO.
Delivery Costs
If you deliver food to customers or cater events, you have two options to deduct the transportation costs. The easiest way is to track your total mileage, as the IRS lets you deduct a standard rate of 58 cents per mile driven.
Or, you can track all the expenses involved with driving (gas, tolls, vehicle wear and tear, etc.) and report the total to the IRS. This gets a little more complicated but for a more expensive car, you could get a larger deduction than from using the standard rate.
Charitable Donations
Donating food to charities can boost your profile in the local community while lowering your taxes at the same time. Your deduction will equal your cost basis (what you paid suppliers for the food) plus one half of what your profit margin would have been if you had sold the food in your restaurant, according to ReFED.
As you figure out your plan, use these tax deductions for restaurant owners to your advantage by working with an accountant or using tax software at your restaurant. Both of these options can help you save as much money as possible. With your taxes settled, you can get back to the more important things on your agenda, like figuring out next week’s specials.
