Operating Expenses
Restaurants may deduct most business expenses, as long as they are “ordinary and necessary” for your business situation. Ordinary expenses are common and accepted in the restaurant industry, like expenses for kitchen supplies. Necessary expenses are helpful and appropriate for your restaurant, like expenses to promote your business to get new customers. Here are some typical deductions for restaurant operating expenses.
Advertising Expenses
You may have been doing a lot more advertising to drive business, and you can deduct those advertising expenses, which include signage, social media advertising, and promotions. Entertainment expenses aren’t generally deductible, but you can deduct the cost of entertainment sold to customers. For example, if you have a band playing while people are dining, you can deduct this cost. You can also deduct the cost of meals and entertainment at a local promotional event for your restaurant.
Driving Expenses
You can deduct driving expenses for your restaurant business, yourself, and your employees, including trips to buy food and supplies and driving to deliver meals. You can take the deduction using either the IRS standard mileage deduction or actual car expenses, whichever the IRS allows. But, you can only deduct the business use, not personal use of the vehicle.
Leasing or Buying a Car for Business Use
Did you buy a delivery vehicle for your restaurant? If you lease or buy a car to use for your business, you can deduct loan interest or lease payments. You can only deduct these expenses for the percentage of the expense that represents your business use of the car. If you buy a car for business, you can depreciate the cost (spread deductions out over time). You must use the car more than 50% of the time for business to depreciate the car.
Employee Pay and Benefits
Employee pay and benefits are a big portion of your costs as a restaurant owner. Fortunately, you can deduct:
Employee pay, including bonuses, commissions, sick pay, and vacation pay Employee benefits, like health plans and life insurance coverage
Cost of Goods Sold
The cost of goods sold (COGS) is a critical deduction for your restaurant because it directly affects your gross profit each year. It’s also a tricky calculation for your tax return because the food and supplies in your inventory change daily. To calculate COGS for tax purposes, you’ll need to know your beginning inventory at the start of the year plus all your purchases for all the products you sell, and then minus your ending inventory.
Improvements and Equipment
Upgrades and improvements to your restaurant (like adding a drive-through window or upgrades to your ventilation and air-conditioning systems) are considered capital improvements and they must be depreciated (deductions taken over several years).Equipment you buy for your restaurant also must be depreciated.
Repairs and Maintenance
Repairs and maintenance expenses that don’t improve the value of your property can be deducted in the year the work was done. Improvements to the property, on the other hand, must be depreciated. In other words, you can deduct the cost to replace a broken window in the first year, but you must depreciate the cost of new energy-efficient windows.
Qualified Business Income Deduction
Restaurant owners (not corporations) may qualify for an additional 20% deduction on their business net income for the year. You may be able to take the qualified business income (QBI) deduction in addition to your normal business income, and it’s included on your personal tax return.
Deducting Operating Losses
If you had a loss from your business operations in a specific year, you may carry forward and you can take the loss to offset other income you may have for the year. Corporations can also take deductions on operating losses, but with different regulations.
Charitable Donations
You can donate food, gift cards, and other items to charities, but whether your business gets a tax deduction for your donation depends on your business type. Restaurant owners who pay business taxes through their personal tax returns usually can’t deduct these charitable donations unless they itemize deductions. Also, the charity must meet IRS requirements. If your restaurant is a corporation, the business can make charitable donations to qualified charities, with specific limits.
The Work Opportunity Tax Credit
This tax-saving measure isn’t a deduction, but it may be even more beneficial. The work opportunity tax credit (WOTC) is a tax credit, which means it can create dollar-for-dollar savings off your business tax bill. You can get the credit for hiring individuals from certain qualified groups of people who face significant obstacles to employment, such as veterans or ex-felons.
Keep Good Records to Prove Deductions
The burden of proof is on your business to prove your deductions. You don’t have to include your business records with your tax payments, but you must be able to show the documents to an auditor or inspector as proof of the deductions. Keep especially good records for business driving expenses, gifts, and for depreciating property.
