4 Money Saving Tax Tips for Restaurants You Shouldn’t Miss

March 23, 2015 / Reading: 5 minutes

April 15 is only a few short weeks away. And while savvy restaurant owners use a proactive approach to taking advantage of the business tax deductions they’re entitled to, many restaurants who qualify for a variety of unique tax provisions leave money on the table simply because they aren’t aware that they are available to them.

As a restaurant owner, you have some unique costs for which you are eligible to claim deductions. This can provide you tax relief and potentially save you a significant amount of money by reducing your taxable income. After all, by maximizing your tax deductions you lower your reported profit, which minimizes the taxes you owe to Uncle Sam.

Many restaurants are not taking advantage of tax provisions that could save them a lot of money.

To help you claim the deductions you deserve and lower your tax burden, we have compiled a list of restaurant-specific write-offs you don’t want to miss:

1. Food Costs

As a restaurant operator, you know that food costs are one of the highest expenses in the food industry. In fact, they can often amount to over a third of total costs incurred in the course of running a restaurant.

Luckily, you can offset the cost of food expenditures and lower your total tax bill by taking advantage of the tax deductions available to restaurant owners.

Examples of what is deductible:

  • Direct food costs (e.g Raw ingredients, meats)
  • Pre-packaged or canned food
  • Indirect food costs (e.g Frying oil, condiments)
  • Wasted food (e.g. spoiled or stale ingredients)

And while some restaurant owners believe that they are only allowed to deduct the cost of food that was actually used for meal preparation, that is fortunately not the case: You can write-off food and beverage costs as they are incurred, which saves you from having to run inventory of what is remaining at the end of the year.

2. Labor & Employee Compensation

The cost of providing the food to customers — such as paying waitstaff or kitchen crew — is one of the largest expenses in a restaurant.

The good news is you can claim a business expense deduction for the cost of the human component involved in running a restaurant. This includes wages and salaries that you pay the employees such as cooks, servers, manager and bartenders. In addition, if you offer any benefits such as health insurance, paid holidays and sick leave; you can receive tax deductions on that well, helping you reduce your tax bill.

Examples of what is deductible:

  • Employee salaries, wages and bonuses
  • Employee tips (provided they were reported to the IRS)
  • Sick leave and vacation pay
  • Health insurance

What is not deductible:

  • If some or all of the profit generated by the restaurant went to the owner, it cannot be claimed as a tax write-off since the IRS excludes it from the labor deduction.

3. Marketing & Advertising Costs

As a restaurant owner, you most likely have invested money in a variety of marketing channels with the goal of attracting more customers to your establishement. But did you know that for the most part, the marketing & advertising costs involved in promoting your restaurant are also Tax-deductible?

Regardless of whether your marketing expenses are sizeable or not, it pays to take advantage of deductions that could help ease your overall tax burden for 2014. Especially since there is no dollar limit or other special rules for determining deductibility of your restaurant’s marketing costs.

Examples of what is deductible:

  • Directory advertising
  • Online advertising costs (e.g. Google Adwords)
  • Brochures
  • Billboard rentals
  • Promotions and prize awards
  • Sponsorship of events or teams
  • Web site design, development and maintenance

What is not deductible:

  • Some expenses that can be attributed to marketing may not be claimed as deductions. The most notable example being coupons and discounts that you offer to customers, since they are simply a reduction in the final amount of the sale they helped generate.

4. Loan Interest

If you take out a loan to buy inventory or new equipment for your restaurant, you can deduct the interest that you paid on that loan during the year. In fact, most business-related interest payments can be deducted, whether it is for credit cards, line of credit or working capital loans. The most important requirement is that it the money borrowed be strictly for business, in which case the interest would be considered a business expense.

Let’s say for example that in 2014, you borrowed $70,000 to renovate your dining room or to reconfigure your kitchen. You would be able to write off the interest amount that you paid in 2014 since the loan is for business purposes. The same applies if you took a loan to replace outdated kitchen equipment.

On the other hand however, if you take out a loan to renovate your own house, you will not be able to deduct part of the interest payments since the proceeds of that loan were for personal effects.

Examples of what is deductible:

  • Loan for working capital.
  • Loan to expand your restaurant.
  • Loan used to buy new kitchen equipment / furniture for your dining space.
  • Money borrowed to buy inventory.
  • Credit card used for business purchases.

What is not deductible:

  • Loans used for personal purposes (e.g. wedding or a vacation).
  • Debts your restaurant doesn’t owe.
  • Interest on overdue taxes.
  • Loans used to pay taxes.
  • Money borrowed to fund retirement plans.

DISCLAIMER : While the information in this article is derived from sources believed to be accurate, it is not intended as tax or legal advice, and cannot be relied upon for any purpose without the services of a qualified professional. It is always best to check with the IRS and see what their current rules and options are.

  • Eric Schwartz

    I recognized that understanding tax issues related to restaurant industry can be more time-consuming and complicated. To get a better understand the tax obligations, hiring an expert will be the best option. I used 212 Tax and never felt so good.