DISCLAIMER: This content is provided for informational purposes only and is not intended as legal, accounting, tax, HR, or other professional advice. You are responsible for your own compliance with laws and regulations. You should contact your attorney or other relevant advisor for advice specific to your circumstances.
According to the National Restaurant Association, restaurant income tax rates can reach as high as the 30% range, depending on business structure (sole proprietor, LLC, etc.). In an industry that lives or dies by razor-thin margins, tax preparation and planning is an essential survival skill.
Income taxes are part of doing business. In the restaurant world, preparing income taxes is like assembling an intricate formal banquet — pulling ingredients from all of your front- and back-of-house operations together and spreading them out for the Internal Revenue Service (IRS) to review.
More than profits and sales, your tax forms are the summation of your business activities, including:
- Payroll/Labor costs — Amounts paid in wages to your employees, total number of hours worked (and in what areas), employer taxes and other taxable benefits, like bonuses and tips.
- Inventory — The cost of the food, beverages, and other items you need on hand to run your business.
- Sales tax — The total amounts of federal, state, and local taxes collected and paid to respective authorities.
- Capital investments — Substantial purchases, like major kitchen equipment or the building housing your restaurant.
- Other expenses — Other business expenses, from basic maintenance and repairs to office and cleaning supplies, that accrue as part of the day-to-day of running your operation.
Too many people think running a restaurant is all about the food and forget it’s a business and needs to be run like one — and that’s why so many fail. Restaurant math is the fundamental formula for success.
In order to get the information you need, your point of sale (POS), accounting, time tracking, inventory, restaurant payroll, and other systems must all work together — generating and sharing data that becomes your cost of goods sold (COGS), profit and loss (P&L) statements, and other key reports.
Along with all this restaurant software, a qualified bookkeeper and an accountant are invaluable in establishing processes and procedures to accurately record all of this information. They are your best friends during tax season, too, because they guarantee you a stress-free filing process that covers all the numerous tax-related bases involved in running a restaurant.
Minimize Tax Payments by Maximizing Deductions
Tax deductions – expenses you can claim against the amount you owe – are the single best way to lower your overall tax bill. Here are some of the tax write-offs all restaurants should know about:
A fancy way of saying that you can claim some or all of the costs of major purchases, like ovens and other large pieces of kitchen equipment. (Some of these costs may require you to claim certain percentages per year over a set amount of time.)
Costs of Goods Sold (COGS)
Includes all of the items, inventory, labor, etc. used to produce the meals you serve. In some instances, you may even claim the costs of foods/ingredients prepared offsite.
Marketing and Advertising Costs
You can claim almost anything, with the exception of political ads.
Includes cloud-based, software-as-a-service (SaaS) applications.
Employer Taxes (Payroll Taxes)
You can deduct employer-paid contributions to social security and Medicare, as well as federal and state unemployment taxes (FUTA/SUTA).
Gifts over $25 and celebratory meals, like holiday parties or team building events.
Work Opportunity Tax Credit
If you employ workers in targeted groups, such as veterans or those who may have faced barriers to employment, you may be able to claim up to 40% of the first-year’s wages up to $6,000.
Includes bookkeeping and accounting fees, along with any other professional services, like lawyers.
You may claim contracting fees of $600 and above.
Maintenance and Repairs
Facility maintenance and repairs are deductible expenses.
Thanks to a “safe harbor” agreement, restaurants may write off up to 75% of renovations.
You can deduct property, liability, and other premiums.
You can claim the interest on a vehicle you lease or have purchased for your business as well as the interest on facility mortgage or lease payments.
Business Use of a Vehicle
Mileage, maintenance, fuel, insurance, parking, and other costs associated with a car or truck used for business purposes can also be written off.
Any fees incurred as part of running your business, including ATM fees.
Keep Meticulous Records All Year Long!
The IRS is as picky about documentation as a health inspector is about hand washing. Every expense needs to be backed up by documentation. Even if you don’t submit these items, you need to keep them on hand for a minimum of three (3) years.
“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.”
— Brendon Pack, Vice President, 1-800Accountant
Keep the following forms of documentation for when you submit a tax return:
- Mileage logs
- Lease agreements
- Insurance statements
- Expense reports
- Payroll reports
- Inventory reports
- Sales reports
- Balance sheets
- Cash flow statements
Another perk of working with a bookkeeper and using the right accounting software is that you can organize your expenses into categories so that you can keep track of totals and documentation throughout the year.
Pay Something, Pay Late, But Don't Skip Filing
The IRS is not a generous lender, and restaurants face enough scrutiny as it is. Rather than paying late or missing payments, file an extension or at least make an effort to pay something. Note that the failure to file penalty is substantially larger than one for failure to pay.
Small business lender Kabbage also recommends talking to the IRS in order to negotiate or show reasonable cause. In other words, if you have a cash flow problem, reach out and establish some form of communication.