Taxes. The smallest word that often causes the most confusion for anyone and even more for business owners.
Restaurants, in particular, have complex tax laws. Your taxes depend on many various factors; location, property size, number of employees, and most importantly, revenue.
Right now, restaurants are critically thinking about their bottom line as they prepare for the loss in sales due to closures or limited operations.
Since it’s tax season, operators are left searching for new ways to save money on their taxes. So, to help, we’ve gathered the essential things you need to know for maximizing your restaurant’s tax deductions and credits.
Use these resources to help guide you for more information on filing taxes:
- Tax Time Guide: How to do taxes for free and get refunds fast from the Internal Revenue Service (IRS)
- Small Business Income Tax Guide for sole proprietors and single-member LLC
- Corporate Income Tax Guide – Including Subchapter S Corp
- Guide for Business Taxes for Partnerships
Tax Deductions for Restaurant Owners
What is a tax deduction? A tax deduction is an expense that lowers a person or business’s tax liability by reducing their taxable income.
Expenses accrue over the year and can be applied against or subtracted from your gross income to figure out how much tax you owe.
All deductions must be deemed ordinary and necessary business expenses.
Here are some of the expenses that you can deduct when filing your income tax return with the IRS:
The first and one of the most significant expenses, along with labor, is food.
Food costs can include raw ingredients, canned food purchases, spices, oil, etc. The cost of food can also include spoiled food that goes to waste and cannot be served.
Refreshments like soda, bottled water, liquor, beer, juices, milk, etc., are also part of food costs.
Another major expense in a restaurant is the labor of your employees. This includes your front and back of the house staff and managers. You can deduct gross wages and employment taxes that you pay based on employee work and tips like unemployment, Social Security, and Medicare taxes.
You can also include benefits such as sick leave, retirement accounts, insurance, and vacation.
Utensils & Table Items
Anything that is used for guests to eat can also be a deduction. These supplies can be glassware, plates, condiments, napkins, menus, to-go boxes, etc.
These expenses include kitchen equipment, tables, chairs, and improvements to the building.
If you own a vehicle for your restaurants, such as a catering or delivery car, it’s also a capital expense.
Capital expenses have a longer life of more than one year, so you must set them up as business assets. This is to prevent them from being written off in total in one year.
The IRS does set limitations to how much of each class of assets can be expensed each year.
Fees & Insurance
Any fee you have such as:
- Professional fees – accounting, lawyers, contractors
- Banking fees
- Software fees – like your cloud-based POS station and software-as-a-service (SaaS) applications
You can also deduct property and liability insurance, along with other policies used to protect your restaurant location, employees, and customers.
Marketing & Advertising Costs
Write off any marketing that you have paid for, including but not limited to:
- Social media advertising
- Google AdWords
Tax Credits to Take Advantage of Now
According to Restaurant365, “A tax credit is a direct reduction in your tax liability. A tax credit is an incentive to entice businesses to conduct certain hiring and/or investment activities such as:
- Hiring individuals from certain groups that face high employment
- Hiring or investing in economically disadvantaged areas
- Investing in a particular activity
- Retaining employees after natural disasters and other events.”
Here are 3 of the tax credits you need to know about:
#1) Employee Retention Tax Credit
Eligible restaurants can access the Employee Retention Tax Credit (ERTC) for both 2020 and 2021 to receive economic relief in the form of tax credits for qualified employee wages. These specific payroll wages are only eligible if they were not directly paid for by PPP loan funds.
Employers can get up to $5,000 per employee for a calendar quarter in 2020. Additionally, they can also receive up to $7,000 per employee per quarter for January 1-March 31 and April 1 – June 30, 2021. That’s a total of up to $19,000 per eligible employee in ERTC!
Eligible circumstances are:
- Operations fully or partially suspended due to the government’s orders, including; outdoor dining only, 50% indoor capacity, & curbside/to-go service only.
- A significant decline in gross receipts when comparing quarters to 2019.
See if you are eligible and find a full breakdown of ERTC from the National Restaurant Association here.
#2) Credit for Sick & Family Leave
An employee who cannot work because of self-quarantine due to COVID symptoms is entitled to paid sick leave for up to ten days (up to 80 hours).
This will be at the employee’s regular pay earning up to $511 per day and no more than $5,110 in total.
These instances impacted by COVID-19 will be directly reduced in your tax liability with the credit for sick and family leave.
#3) Work Opportunity Tax Credit
Another tax credit you can benefit from is the Work Opportunity Tax Credit (WOTC). WOTC is a Federal tax credit available to employers hiring people from certain qualified groups of people who face employment barriers.
Find more information on WOTC targeted groups and requirements for this credit from the IRS here.
Quick Tips for Avoiding An Audit
It’s important to note that restaurants are frequent targets for tax audits.
Why? Many owners don’t file taxes by the due date, don’t keep a record of income, or reports of income don’t match statements.
Here are five tips on how to avoid an audit from the author of Restaurant Tax Solutions, Robert Boeshaar:
- File your taxes on time. The tax-filing deadline for this year is April 15, 2021. (IMPORTANT: The IRS just declared that victims of this month’s winter storms in Texas have an extension of two months until June 15, 2021.)
- Work with tax professionals to avoid making mathematical errors. It’s better to pay somebody and get it right the first time versus paying more in costly mistakes.
- You must report all your income. Failing to report all your taxable income, especially intentionally, can lead to severe issues. Keep a report of all the income the restaurant receives, and don’t forget to include tips!
- Don’t make invalid or excessive deductions. Though there are many deductions available, make sure the ones you use are valid, and you can back up.
- Classify your workers correctly. Failure to do this can lead to a lot of trouble. You are required to withhold payroll taxes and issue W-2 forms to your employees. Some restaurants try to classify workers as independent contractors to avoid doing this, leading to hefty fines.
The Bottom Line
Being a restaurant owner isn’t a cheap endeavor, so you must do your research to reduce your tax liability.
Get help from your tax advisor and go over the deductions and credits above to see if they can help minimize what you owe this tax season.
Disclaimer: This content is intended for informational purposes only and should not be relied on for tax, legal, or accounting advice. You should consult with your tax advisor, and you are responsible for your own compliance with laws and regulations.