1. Food and beverage cost tax deductions
Cost of Goods Sold (or COGS) is crucial for a restaurant owner’s taxes. It’s your product — the money you spend to give customers food and drinks. This includes:
- The cost of ingredients and raw materials
- Food supplies
- Packaging
- Any items used directly in food and drink preparation
The Internal Revenue Service (IRS) considers this a deductible business expense. Tracking these operational expenses helps reduce taxable income based on actual production costs.
Unfortunately, food waste and spoilage are common in restaurants. The food costs associated with disposing of spoiled food and minimizing waste can be deducted to help cover the losses from perishable goods.
2. Restaurant insurance premium write offs
Restaurant insurance is essential in the food service industry. It helps protect everything from fire damage to workplace injuries to liquor liability claims.
Some types of coverage are mandated in your state, such as workers’ compensation insurance. Others, such as general liability insurance, could be required if you try to get financing for your business. And commercial property insurance could be a necessity if you want to rent space for your business.
Luckily, you can often write off all of your business insurance premiums come tax season. The IRS usually considers these costs as an “ordinary and necessary” business expense.
Read: Is business insurance tax-deductible? How to write off business insurance.
3. Labor cost tax deductions
Unless you’re a one-person show, labor is probably a significant expense in your operation. However, wages, payroll taxes, benefits and even employee tips can be tax deductible. This includes overtime, holiday and vacation pay.
And do you feed your workers? Employee meals provided during their shifts are deductible.
And if your restaurant requires uniforms, you can also write off their cost, including maintenance and cleaning.
4. Rent, equipment and utilities
Your physical space can be a goldmine for restaurant tax deductions.
- Rent. If you rent a restaurant space or lease equipment, these expenses are tax deductible.
- Office and storage. Costs for storage units or office spaces used for the business are also eligible for write offs.
- Everyday work supplies. Everything you use for your back of house and front of house, such as kitchen utensils and cookware to office supplies and cleaning materials, is deductible. Small equipment purchases not considered capital assets (such as blenders or coffee makers) may also qualify as a tax deduction for restaurant owners.
- Large kitchen equipment. Things like ovens, refrigerators and dishwashers lose value over time. You can deduct a portion of this loss each year as depreciation, reducing your taxable income incrementally.
- Regular equipment maintenance and repairs. This may include repairs for equipment like ovens and freezers, as well as minor building upkeep (for example, plumbing or electrical repairs) can all be written off.
- Utilities. Gas, electricity, water, waste removal, phone and internet costs are necessities for running a restaurant. Deducting these utilities can help balance the high cost of keeping a restaurant operational.
5. Restaurant marketing and advertising tax write offs
Promoting your restaurant is essential for growth. A restaurant can use many marketing and advertising tactics, and their full cost can be written off as a business expense.
For instance, if you run online ads, social media campaigns, develop your website or send promos via email — these costs are deductible. Do you print flyers, menus and coupons? Write it off. Maybe you sponsor local events, collaborate with other businesses and have booths at local festivals and fairs? These can usually be written off as a business expense.
Read how to develop a successful restaurant marketing plan.
6. Writing off professional services
It takes a village to run a restaurant, and even a small business can sometimes be complicated. You may enlist the services of accountants, bookkeepers, attorneys, consultants or other professionals for restaurant-related services, their fees are tax deductible.
7. Vehicle-related expenses for your restaurant
If you use a car, van or other vehicle for your restaurant business, you may be eligible for mileage, fuel and parking deductions. This can apply to any vehicle used to buy or transport ingredients, or for catering or delivery. Always be sure to keep track of your mileage and gas receipts for tax time.
Read: Mileage deductions for small business: How to calculate and deduct.
8. Point-of-Sale (POS) system and software costs
Expenses related to your POS system, including software and hardware used to manage sales, inventory and reservations, can be deducted.
You may use other software for accounting and payroll, managing employee shifts or a loyalty program. Whether you paid in full or a subscription, these fees can be deducted.
Additionally, fees and commissions paid to platforms your restaurant might work with, such as DoorDash or Uber Eats, are tax deductible as business expenses. Don’t forget to write off your costs for listing, marketing and delivery services.
Read: Restaurant management software: The 4 best tools to run a restaurant.
9. Music and entertainment expenses write offs
Music creates a mood and ambiance in any restaurant. Whether you pay for Spotify and speakers or a full live band, you can offset some of these costs with deductions.
Operating costs related to music and entertainment, such as licensing fees for background music, permits for live performances and equipment like karaoke machines, are also tax deductible. Expenses for hiring live bands or DJs can also be written off as business entertainment costs.
3 bonus tax credits for restaurant owners
Tax credits work differently from deductions, but in the end, they also help reduce your tax bill. Restaurant owners can take advantage of these three credits:
1. The Work Opportunity Tax Credit (WOTC)
The Work Opportunity Tax Credit (WOTC) is a federal tax credit that encourages hiring individuals from specific groups facing employment challenges, such as veterans or long-term unemployment recipients.
Employers can earn a credit equal to 25% of the employee’s wages if the staffer works at least 120 hours in the first year, and 40% if the individual works at least 400 hours — up to a $2,400 cap.
2. FICA tip credit
You know FICA (Social Security and Medicare taxes) if you have employees. With the FICA tip credit, restaurants can claim the employer’s share of FICA taxes paid on employee tips that exceed the federal minimum wage. The employer’s share of the FICA tax is currently 7.65%. This credit helps offset the cost of payroll taxes on tipped income.
3. Disabled access credit
The disabled access tax credit assists small businesses in complying with the Americans with Disabilities Act (ADA). It helps cover a portion of the costs associated with making facilities accessible to individuals with disabilities.
Eligible businesses can claim 50% of eligible expenses over $250, up to a maximum credit of $5,000 per year.
