With Tax Day approaching, many people are getting the final touches done on their submittals. With restaurant taxes, you have some special tax considerations that are different from other business types. Before you sign off and file your return, consider these 12 restaurant tax deductions and tips for restaurant owners to maximize the amount of money you keep and can put back into creating delicious dishes for your happy customers.
1. Sales Tax Requirements
The city and state where you operate your restaurant could have different sales tax requirements, and if you own multiple locations, it is even more important to be up to date on the different requirements. They also may require a separate filing and collection, so be sure your records are accurate.
2. Expensing Asset Purchases
If you purchase equipment, like a restaurant POS system, for example, it may be eligible for depreciation deductions. You can either deduct the cost the year it was purchased or spread it out in smaller amounts over several years. An oven can be a large cost, so it’s best to maximize your savings on it. A permanent tax deduction is now available for equipment for small business under Section 179. Previously, only certain capital investments could be depreciated over some years but now may be taken as a lump sum deduction in the year it was purchased.
3. Compensation and Taxes
If employees receive benefits and compensation, they must be provided for work that employees perform. If you are audited, and the IRS believes you are overcompensating employees based on other amounts reported within the restaurant industry, you may not be able to deduct them fully.
4. Mileage Deductions
Using your vehicle to deliver food or for catering, events are eligible for mileage deductions, but you can deduct either the miles you drive for business OR the actual expenses incurred. You may not deduct both, and you are stuck with the method for several years. Be sure to determine which option saves you the most.
5. Employee Meals
Providing meals to employees at your restaurant’s physical location can be deductible to the restaurant and not taxable to the employee. It can be included in the cost of food or recorded separately.
6. Keep Proper Records
Seems like a no-brainer but maintaining solid files, both physical and electronic, are critical to managing your restaurant. Keeping them handy for bookkeeping and tax time will make it easier to track all the purchases you make.
7. Explore Business Tax Credit
You may qualify for a tax break if you hire individuals from certain groups such as veterans, the disabled, former felons, recipients of Food Stamps, residents of Empowerment Zones, individuals referred by vocational rehabilitation services, and more for the Work Opportunity Tax Credit. The credit is about equal to 40 percent of first-year wages for the employee of up to $6,000.
8. Revenue Procedure 2015-56
You may be able to deduct the cost of remodeling or updating your locations by treating 75 percent of qualified costs as ordinary and necessary expenses, and the remaining 25 percent can be capitalized and depreciated over time as costs for improvement. The scope must be larger than repainting or cleaning, but the can be a significant deduction on your taxes.
9. Charitable Deductions
Business owners also qualify to deduct their charitable donations, just as individuals can, but be aware that not everything you donate is eligible. The cost of the food you provide is deductible but staff time or the full cost of services is not.
10. Employee Tips
Even though most people tip between 15 and 25 percent to their servers, the IRS uses eight percent of their estimates when tips are not accounted for meticulously. The business owner must deduct eight percent of employee’s sales for cash payments and rely on their POS system for credit card tips.
11. Form 8027
Also dealing with employee tips, this form is the “Employer’s Annual Information Return of Tip Income and Allocated Tips” and is due at the end of February for those who file in paper form and March for those who file electronically. It requires gross receipts and accurate reporting, so brush up on the rules with your staff as well.
12. Miscellaneous Deductions
Here are some more specific examples of tax deductions for restaurant owners (you can use a free accounting app like ZipBooks to track all of these):
- Food costs, such as your raw ingredients, pre-packaged/canned food items, oil, sugar, spices
- Beverages, like bottled water, soda, beer, wine, liquor, milk, juice,
- Kitchen appliances, pots, pans, ovens, microwaves, toasters, blenders, dishwashing machines, platters, soap
- Eating supplies, plates, bowls, cups, utensils, paper products, cloth napkins, table condiments
- Employee salaries, insurance, retirement accounts, sick leave, vacation pay, and bonuses for your cooks, servers, hosts, bartenders, dishwashers,
- Employee gifts of up to $25 per person, per year
- Property rental costs you incur to maintain the location of your restaurant
- Maintenance expenses for a property, i.e., utilities, a cleaning service, structural repairs, etc.
- Equipment, i.e., tables, chairs, barstools, cash registers, POS systems, computers, lighting fixtures, window displays, restaurant decor, menus, office supplies, and other related items
- Fees for accounting, legal, merchant processing, and other professional service providers you need to maintain your restaurant business successfully
- Property insurance, liability insurance, and other policies designed to protect your physical restaurant location(s), employees, and customers
- Marketing and advertising expenses, such as coupons, flyers, a website, social media ads, Google AdWords, and other paid advertising to promote your restaurant
We hope these tax tips for restaurant owners was useful and beneficial for your business. It can all feel overwhelming and scary, but by keeping up to date on some of the basic rules, keeping your receipts handy and safe, and using a restaurant tax professional for the details, you can maximize your restaurant tax deductions and save money in your pocket and put it back into your hard-earned business.
Tax Tips and Deductions for Restaurant Owners by Brendon Pack
Filing it Down: 10 Tax Tips for Restaurants by Matthew Griffith, Jan 21, 2018
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