From sit-down steakhouses grilling up delicious ribeyes to ice cream shops offering the sweetest variety of flavors in town, there are all types of restaurateurs out there who want to make their customers happy through the high-quality food and beverages they serve each day.
Despite the numerous expenses that come with the territory in the food industry, restaurant owners are eligible to take full advantage of a number of tax-saving strategies and deductions to help them save money and stay compliant with tax authorities. Follow these tips from 1-800Accountant to help make the process of handling your taxes and deductions easier.
Understand your sales tax requirements
Make sure you are fully up-to-date on the sales tax requirements of the city and state in which your restaurant is located. If you operate multiple locations, this is even more important.
Remember that cities, counties, and states often have different sales tax requirements. Each location in which you maintain a restaurant may require separate sales tax collections and filings, so it’s critical to keep track of this important financial information so you can properly report and submit all sales taxes to all respective agencies.
Consider depreciation of some expenses
When purchasing equipment for your restaurant, you can either deduct the cost of the equipment in the year in which it was purchased, or you can deduct it in smaller amounts as its value depreciates over the course of several years. More expensive equipment, such as an oven, is often best to depreciate to maximize your tax savings on it.
Understand compensation and taxes
If you have employees who receive compensation and benefits, there are some rules on deducting this pay and these perks that you provide them.
Any form of compensation you dole out must be provided for work that your employees perform. If the IRS reviews your tax and payroll data and believes that you are overcompensating employees based on other compensation amounts reported on returns within the restaurant industry, these payments you offer may not be fully deductible. However, by staying in line with reasonable compensation, you should be just fine when writing it off.
Consider your mileage deduction options
If you use your personal vehicle to deliver food or for catering groups at events, don’t forget that you can deduct either the miles you drive for your business or the actual expenses you incur for driving in your restaurant business—not both.
Plus, once you choose either of these write-off options, you’re generally stuck with this method for several tax-filing years. So, it’s wise to make the calculations to determine which option will save you the most on your taxes.
Understand employee meals and taxes
The cost of providing meals to employees at a restaurant’s physical location is generally deductible to the restaurant and not taxable to employees. This cost may be included in the cost of food, or it may be recorded as a separate expense.
Keeping proper records is critical
Always maintain solid tax records by documenting all purchases and keeping all relevant receipts on file.
Managing a restaurant comes with far more expenses than other types of self-employment, so this is extremely important. Consider keeping both hard copies and electronic copies of these records for safekeeping and easy access when you need this financial information. Such data is necessary for bookkeeping requirements as well.
Explore a business tax credit
Consider the Work Opportunity Tax Credit—if your restaurant hires individuals within “targeted groups,” which often include military veterans and the disabled, your business may qualify for a nice tax break.
This tax credit is generally equal to 40 percent of first-year wages for the respective employee up to $6,000.
Tax deductions for restaurant owners
A tax deduction is a tax-saving measure you can take that reduces the amount of taxable income you report on your return. For example, if you earned $1,000 of income within a given year and claimed a $100 deduction, you’d only have to report $900 of taxable income when filing Form 1040 or a business return.
As a restaurant owner, you can typically deduct the following expenses you incur to operate your business when filing your income tax return with the IRS:
- Food costs, i.e. raw ingredients, pre-packaged/canned food items, oil, sugar, spices
- Beverages, i.e. bottled water, soda, beer, wine, liquor, milk, juice, etc.
- Kitchen appliances, i.e. pots, pans, ovens, microwaves, toasters, blenders, dishwashing machines, platters, soap, etc.
- Eating supplies, i.e. plates, bowls, cups, utensils, paper products, cloth napkins, table condiments, etc.
- Employee salaries, insurance, retirement accounts, sick leave, vacation pay, and bonuses for your cooks, servers, hosts, bartenders, dishwashers, and anyone else who lends a helping hand in your restaurant
- 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, computers, lighting fixtures, window displays, restaurant decor, menus, office supplies, and other related items
- Depreciation on property, which you can gradually deduct in smaller amounts over the course of several years
- Fees for accounting, legal, merchant processing, and other professional service providers you need to successfully maintain your restaurant business
- 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
Tying it all together
If you look at some of the most successful independent restaurants and chains that have been around for years, there’s a good chance their owners are using the above tax strategies and write-offs to strategically manage their lofty tax requirements from the IRS and other tax authorities.
Being a business owner in any industry isn’t a cheap endeavor, and restaurant ownership is considered one of the more expensive—and competitive—fields out there. So, you must do your research to determine what steps you can take to reduce your tax liability and hang on to more of your hard-earned income.
You work hard for your money, and you deserve to legally keep as much of it as possible to put your restaurant on a prosperous path.