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6 Restaurant Tax Deductions to Know

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    Restaurant tax deductions can make a huge impact on your tax burden as an owner of such establishments. It can be overwhelming and time-consuming to focus on tax planning on top of your other duties, but doing so can help you boost your bottom line with the right business investments. The right help from a tax professional will mean you know you’re claiming everything you can.

    How do you know if you qualify for tax breaks, and what expenses can you write off? This guide will cover the business tax breaks and deductions that could be available to you, eligibility requirements, and other tips to know when tax season rolls around.

    Tax Deductions For Restaurants

    What Are Restaurant Tax Deductions?​

    Restaurant owners have to cover different business costs to provide professional-quality food and associated services, including: 

    The good news is that many of these expenses are tax-deductible, helping restaurants save tax dollars and improve their bottom lines. There are many tax deductions available for businesses of all sizes, and eligibility will depend on factors like how the restaurant’s business structure is set up. Understanding what the Internal Revenue Service (IRS) considers to be a restaurant is thus crucial, and it’s important to keep receipts and records of all transactions related to the business so that all expenses can be tracked and managed.
    Business Tax Restaurant Tax Deductions

    What Kind of Business Is Considered a Restaurant?

    The IRS defines a restaurant or tavern as a business that “consists of preparing food and beverages to customer order for immediate on-premises or off-premises consumption.” Some examples of this kind of business include:
    COVID-19 requirements in some states led some businesses that were not formally restaurants to start serving food to allow customers inside. If your business is one of them, talk to a tax professional about whether your specific activities qualified as a restaurant for IRS purposes.
    Restaurant Tax Deductions Icon

    6 Restaurant Tax Deductions to Know About​

    As with any business, operational expenses and other everyday costs are deductible, as long as the expense is both “ordinary and necessary.” In other words, expenses that are written off must be related to operating the business and must be a required cost. Here are a few deductions you could be missing out on.

    1. Business Equipment

    Restaurants need a range of equipment to operate, including ovens, furniture, a soda machine, and other devices and machinery. You can deduct these expenses on business equipment in full on your taxes under Section 179 of the tax code. So, anytime you have to make an upgrade, remember to keep your records and receipts to be able to claim them at tax time. 

    There are caps on this deduction to be aware of, however: In 2021, $1,050,000 is the limit for the total written-off amount, and $2,620,000 is the cap on equipment purchase deductions.

    2. Operating and Food Costs

    Fortunately, businesses can also write off all food and operational costs. Here is a full list of expenses you can deduct:

    If you have questions about what’s included, a tax professional can help you sort through your expenses.

    3. Employee Compensation

    Restaurants can deduct all compensation paid to employees, such as salaries, benefits, gifts, bonuses, and free employee meals. Employees’ tips are non-deductible, though, since that compensation is technically made directly by the workers. One important note about tips: It’s your responsibility to ensure that employees make at least minimum wage when combining their salary and tips. That means you still need to track how much they’re making in tips at the restaurant.

    4. Transportation Expenses

    If your restaurant has a delivery or catering service, you may be able to write off transportation costs. You can track your mileage to deduct or write off all transportation expenses, including the cost of gas and normal wear-and-tear costs on the vehicle.

    The mileage write-off is $0.56 per mile, which is easier to claim and often works out to be higher than itemizing vehicle costs. However, if the vehicle is expensive — like a luxury car or specialty food delivery vehicle — then wear and tear costs can exceed the mileage deduction. A tax advisor will help you figure out which option is a better deal.

    One important note about tips: It’s your responsibility to ensure that employees make at least minimum wage when combining their salary and tips. That means you still need to track how much they’re making in tips at the restaurant.

    5. Donations to Charity

    Many restaurants donate food or other items to local charities. These donations are tax-deductible, and the written-off amount can be equal to the lesser of either:

    Note that the cost of staff time is not deductible, so you will still need to speak to a tax professional to understand how to proceed with charitable donations and deductions.

    6. Qualified Business Income Deduction

    Beginning in 2018, businesses set up as pass-through entities can claim an additional 20% deduction known as the Qualified Business Income deduction. The restaurant must be a pass-through entity, however, or the restaurant owner must have pass-through income through a sole proprietorship, partnership, or S corporation, to qualify for the deduction.

    This one can be complicated, especially when it comes to restaurants, so always make sure to discuss your options with a tax professional.

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    Get Help with Your Restaurant’s Tax Deductions​

    Claiming the right tax deductions is important for any business, especially restaurants, where the costs of supplies, labor, and location all put stress on your bottom line. Understanding what is and isn’t deductible can be complicated and confusing, but it doesn’t have to be when you work with the right tax team.

    Getting help from an experienced tax professional is the right way forward so you are always following all applicable requirements and understand which deductions are eligible for your restaurant. Reach out to Silver Tax Group to speak to a tax expert about restaurant tax breaks and deductions that your business may qualify for.

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