The truth about completing a tax return is that it can actually help restaurant owners, because almost every element of running a restaurant offers potential tax deductions. Restaurant owners who keep accurate records, plan effectively, and take full advantage of the deductions for which they qualify can reduce their tax liabilities substantially. Sometimes those reductions are enough to push a restaurant from an operating loss to a profit, which seems like a good incentive to explore the tax-deduction landscape.
What Are Restaurant Tax Deductions?
Restaurant tax deductions are expenses that can be subtracted from an establishment’s taxable income, thereby reducing its overall tax liability. Some deductions — such as for food, beverages, and tableware — are specific to the industry. Others, like marketing expenses and insurance coverage, apply to most businesses. All told, almost every facet of running a restaurant offers potential tax deductions.
Consider a customer that charges $18.95 for a blue-plate special. It costs the diner $8.95 to produce this meal, which covers its direct costs of purchasing the food and paying workers to make and serve it, as well as its indirect costs of running the business, such as the booth where the guest sits, the cost of buying plates and flatware, the condiments on the table, the electricity to keep the restaurant lit and the refrigerator running, and the janitorial service that cleans the restrooms.
When the diner subtracts its costs from the price it charges the customer, it’s left with $10 in profit — in other words, taxable income.
For tax purposes, the IRS defines a restaurant as an establishment in which the principal activity is preparing and serving meals, snacks, and beverages for customers to consume on-site. That definition is often stretched to include food outlets that only offer takeout service, food trucks, and bars that serve food. But businesses that sell prepackaged food, including grocery stores, liquor stores, and drugstores, are not included.
Key Takeaways
- Claiming eligible tax deductions can substantially reduce a restaurant’s tax liability and boost its bottom line.
- Virtually every facet of running a restaurant offers potential deductions, but to get the maximum benefit, restaurant owners should be familiar with the rules governing those deductions.
- Operational costs are generally deductible in the year they’re incurred. Capital improvements are typically depreciated and the tax benefits realized over time.
- Keeping thorough and accurate records is vital to claiming the greatest possible deductions and to justifying those deductions should the IRS audit the return.
15 Restaurant Tax Deductions
Virtually every aspect of running a restaurant offers potential tax deductions. The following breakdown of 15 standard tax deductions can help restaurateurs understand which ones they might be eligible for.
1. General Deductions
Many restaurant owners meet the criteria for the qualified business income deduction (QBID), which was introduced as part of the Tax Cuts and Jobs Act of 2017. Also referred to as the Section 199A deduction, this deduction allows small-business owners to deduct as much as 20% of their QBI, encouraging economic growth and investment.
For tax purposes, QBI is defined as the net amount of income, gain, deduction, and loss from any qualified business. It does not include most investment-related income, such as capital gains, dividends, or interest income. The deduction is available to sole proprietorships, partnerships, S corporations, and some trusts and estates, so long as the business owner does not take income as an employee.
There are, of course, rules for taking this deduction. First, the deduction applies only to business income, not personal income. Second, the full 20% is available only to businesses with total income below a specific threshold, which the IRS adjusts annually. The deduction is adjusted if income exceeds that threshold, limited to the greater of two factors: It can’t exceed 50% of W-2 wages paid by the business or 25% of W-2 wages plus 2.5% of the unadjusted basis immediately after acquiring all qualified property.
2. Labor Costs
The cost of labor is one of a restaurant’s biggest expenses — and one that offers several possible deductions. Labor costs include wages paid to full-time and part-time staff, such as kitchen staff, managers, servers, bartenders, dishwashers, hosts, and anyone else the restaurant employs. Tips are also included, and that’s where it gets more complicated. Because tips are paid directly by the customer, they’re considered income to the server but not a labor expense to the restaurant. However, the restaurant is still required to withhold and remit payroll taxes on tips. It can also deduct the portion of payroll taxes it pays on tip income as a business expense.
Predictably, meticulous recordkeeping is essential for all of the above. But it’s also critical because the IRS assumes that gratuities should equal at least 8% of a restaurant’s food and beverage revenue. If the restaurant can’t prove that tips were at least that much, then the restaurant must allocate tips to get to the 8% total. For example, if records don’t show any tips were paid, then the restaurant must allocate the full 8% of the year’s food and beverage revenue; if records show that tips collected equal 6% of food and beverage costs, the restaurant must allocate 2% of food revenue to bring the total to 8%. These allocated tips must then be shared by the servers. Each server must declare the allocated funds as income; allocations are not deductible for the restaurant. However, the restaurant must pay payroll taxes on the allocation and that expense is deductible.
Beyond wages, the employer portion of local and state payroll taxes are deductible. So are the costs of any provided employee benefits, such as health insurance premiums and retirement plan contributions, paid vacation time, and bonuses. If the restaurant provides uniforms to any staff, that cost is deductible; if employees pay for them, then for the restaurant it’s not.
Here’s another important distinction: Suppose a restaurant engages a guitarist as an independent contractor to play during the dinner rush. At year-end the restaurant would issue a 1099 to the guitarist, and the cost of providing music would be deductible as an operational expense, not a payroll expense. Misclassification can lead to stiff penalties.
When considering the tax benefits of labor costs, restaurants also may benefit from another mechanism that can reduce their tax liability: tax credits. Whereas eligible tax deductions are deducted from a restaurant’s total income — thus, for tax purposes, reducing the amount earned — tax credits reduce a tax bill after it has been calculated and are unaffected by income or tax bracket. In simplest terms, deductions reduce income, while credits reduce tax bills.
One tax credit for restaurants is the Work Opportunity Tax Credit (WOTC), which was designed to encourage businesses to hire people who typically struggle in the labor market. This group includes veterans, felons, rehabilitation program graduates, residents of empowerment zones or rural renewal counties, and recipients of state assistance under part A of title IV of the Social Security Act (SSA), among others. Businesses are eligible for this credit only for the first year that the employee is on the payroll. The credit is equal to 40% of the employee’s wages to a limit of $6,000 per employee.
Restaurants may also be able to take advantage of the Federal Insurance Contributions Act (FICA) tip credit. This restaurant-only credit is a refund of all employer-paid contributions to Social Security and Medicare taxes on tips beyond a certain level that were reported as wages. The calculation can be a bit tricky, as it considers several factors, such as the hourly minimum rate and whether the tips are individual or pooled.
3. Food and Beverage Costs
In addition to labor, the cost of food and beverages is another significant restaurant expense. Because these costs relate directly to creating the products sold by the restaurant, in accounting they are described as the cost of goods sold (COGS). COGS is fully tax-deductible.
The obvious place to start is with core ingredients, such as meat and produce. Canned and packaged food is also deductible, as are secondary ingredients, such as oil, spices, flour, and sugar. Even food that never makes it to the dining room, such as spoiled or stale food, is deductible.
Properly deducting food and beverage costs can be challenging. One reason is that the inventory on hand changes daily (or even hourly). Another is that the cost of fresh ingredients fluctuates, affected by extreme weather, soaring fuel prices and other factors beyond the restaurant owner’s control. And sometimes changes in inventory may not correlate to sales, as when expensive liquor is stolen.
Restaurant owners are well advised to track food and beverage costs on a weekly, monthly, and yearly basis, for a number of good reasons. The first is that keeping tabs on inventory, including spoilage, can be invaluable if the IRS ever audits the restaurant’s tax returns. For example, IRS guidelines flag spoilage greater than 8% as “suspicious” and a possible technique for lowballing profits. Good records can counter such suspicions. Having current records is also important because restaurants may deduct food costs as they’re incurred. Finally, beyond the tax benefits, restaurant owners can assess whether their inventory planning is effective and, if not, make changes.
4. Employee Meals
One of the food costs thatrestaurantsmay overlook is providing meals to staff during their shifts. To fully comply with IRS guidelines, the meals must be provided and consumed on-site. Restaurants may choose to track employee meals separately or include them in overall food costs. Either method is OK as long as it’s consistent.
Restaurants may also be able to deduct other staff meals. If a restaurant is rolling out new menu items, for example, and has an after-hours meeting at which employees can taste the new items, those food costs are deductible. Exactly how much is deductible depends on how many employees are there, but if at least half the staff is present, then the food is 100% deductible. Similarly, food costs are deductible if the restaurant has a companywide party, such as for the holidays.
5. Cost of Goods Sold (COGS)
Although food and beverages account for most COGS, they aren’t necessarily the only expenses. To identify other COGS items, the key word is “sold.” For example, to-go packaging, such as food containers and disposable cups and lids, is a tax-deductible COGS item because it’s part of what customers purchase and take with them. In contrast, plates used in the dining room are not COGS items because customers aren’t buying the plates as part of the meal or, of course, taking them home.
If they sell any ancillary products directly related to the restaurant, restaurants can deduct them as COGS. These are often branded products featuring the restaurant’s logo, such as coffee mugs or T-shirts. Other possible ancillary products include ready-made sauces, cookbooks written by the restaurant’s chef, and gift cards. Some restaurants may have designated retail space to sell a broader range of goods beyond their own offerings; if so, the cost of any merchandise purchased for resale is deductible.
6. Operating Costs
While COGS includes costs that relate directly to what the restaurant sells, operating costs are all of the other expenses not directly tied to food production but still required for the running of the restaurant. These expenses fall into three broad categories: fixed, variable, and semi-variable.
Fixed costs are expenses that remain the same regardless of whether the restaurant sells one enchilada combo plate in a month or 2,000. They include rent or mortgage payments, property and liability insurance, salaries, and property tax.
Variable costs are driven by how busy the restaurant is. For example, as a restaurant gets busier, the more cleaning supplies it will need for the kitchen, dining room, and restrooms. And although sales are inarguably a good thing, it’s also true that every time diners swipe their credit cards to pay for their meals, the cumulative expense incurred by the restaurant to pay fees charged by the card issuers becomes greater.
It also stands to reason that the busier a restaurant is, the faster things wear out, break, or need to be replaced. These variable costs include:
- Depreciation for large kitchen equipment (such as ovens and refrigerators) and the costs of uncapitalized equipment, such as kitchen smallware (think: pots, pans, blenders, and knives).
- Furniture (including tables, chairs, booths, barstools and lighting fixtures).
- Tableware (plates, bowls, utensils, glassware, tablecloths, napkins, salt and pepper shakers, candle holders, and so on).
- Dining room equipment (such as coffeepots, ice machines, cash registers, point-of-sale software, and tablet computers used by servers).
- Dining room decor (including floral arrangements, plants, holiday decorations, and artwork).
- Menus.
- Entertainment.
- Work uniforms (assuming that they are provided by the restaurant).
- Office supplies (including paper, printer ink, filing cabinets, file folders, and desk tools).
Semi-variable costs are those with fixed elements (such as an hourly rate) that change based on the restaurant’s volume of business or the time of year. For example, it’s common for restaurants to incur higher labor costs during busy holiday seasons than at other times of year.
It’s important to review all expenses with an accountant because some are deductible as they’re incurred and others must be depreciated and written off over time.
7. Capital Expenses and Improvements
Expenses for capital improvements are substantial enhancements that increase an asset’s value, improve its efficiency, or extend its useful life. Changes that qualify as capital improvements include adding ramps or other features to make the restaurant more accessible to customers with disabilities, installing a large new outdoor sign to attract more business, or adding a drive-through window.
Not all capital expenditures are tangible. If intangible capital assets yield benefits to the business over time, the IRS considers them deductible. Examples include startup costs, such as necessary paperwork and the legal fees attached to them; purchasing a URL and building a website; registering a trademark; and some licenses and permits, the specifics of which vary by state.
Other expenses may or may not be classified as capital improvements. For example, if the restaurant’s water heater fails and the restaurant replaces it with a better, energy-efficient solar water-heating system, that’s a capital improvement (which might also qualify the restaurant for an energy efficiency credit). Similarly, reupholstering all the furniture in the dining room is a capital improvement if it’s part of a broader renovation — a new restaurant owner rebranding what had been a Western-themed steakhouse into a Tiki-themed luau restaurant, for example.
In general, restaurants can realize the tax benefits of capital expenses only over time, either through depreciation (for tangible assets) or amortization (for intangible assets), according to IRS-approved depreciation and amortization methods.
8. Repairs and Maintenance
For tax purposes, repairs and maintenance are any expenses incurred to keep a restaurant’s existing physical assets in good working condition. If the restaurant repairs or replaces the previously mentioned failed water heater with a comparable water heater, that’s considered maintenance. Similarly, reupholstering a handful of chairs to fix holes or tears is considered a repair.
Repair and maintenance expenses can be grouped into four categories:
- Maintaining the building itself, including paint, flooring, security, and climate-control systems, and locks. If the restaurant owns the parking lot and/or landscape attached to it, maintenance of those is also deductible. Building-related expenses are not deductible if the restaurant is renting space and the landlord pays for them.
- Maintaining the dining area, including customer seating, the bar, the host stand and waiting area, and restrooms. For tax purposes, maintenance includes cleaning, so if, for example, the restaurant hires a janitorial service to clean the dining room every night, then the cost of that service is deductible.
- Keeping the kitchen running, including repair of major appliances, plumbing, gas or electric systems. For example, if the restaurant hires an electrician to replace a faulty fuse or a plumber to clear a drain clog, those are deductible expenses.
- Keeping the food preparation and cleaning equipment working. This includes routine maintenance (regular servicing of an ice machine, for example) and emergency repairs (the dishwasher dies), both of which are deductible. So is the cost of replacement parts.
Unlike capital improvements, repair and maintenance costs are typically entirely deductible in the year in which they were incurred. Again, it’s a smart idea to keep accurate records and receipts for all repairs and maintenance in case the IRS has questions.
9. Marketing and Advertising
Restaurants operate in a highly competitive market, so keeping diners coming through the door can be an ongoing challenge. Fortunately, advertising can not only attract business but also earn restaurants a tax break in the process.
Restaurants can deduct advertising in its traditional and modern forms, such as flyers, coupons, newspaper and TV ads, ads on social media and online platforms (such as Yelp), and search engine optimization (SEO). Restaurants can also deduct the cost of professional marketing help, such as hiring a photographer to take great pictures to showcase menu items on Instagram, or when sponsoring local events. That said, the IRS requires that advertising expenses be “ordinary or necessary” — meaning, they are common to the industry and helpful for the business — in order to be tax-deductible.
10. Travel
Any trips made for running the business qualifies for a deduction. That might include buying food at a local farmers market, picking up equipment at a restaurant supply warehouse, or flying across the country to attend a restaurateurs’ convention. Restaurant owners needn’t make these trips personally. Employees are often asked to drive to destinations on behalf of the restaurant, often using their own vehicles. Most commonly, that’s to deliver meals, but errands are also deductible, provided the employee travels on behalf of the restaurant.
Several variables influence how a restaurant can claim these expenses. One option is for the restaurant to own or lease a car for the business to use. As long as at least half of the car’s use is for business, the loan interest or lease payment and depreciation is deductible. Of course, restaurant owners or employees can also drive their personal vehicles for business. In those cases, the mileage accrued during business use is deductible. Restaurants can calculate that deduction in one of two ways. The standard mileage rate is simplest: Multiply the miles traveled by the standard rate determined by the IRS; for 2024, the rate is 67 cents per mile. The other option is the actual cost method, which requires tracking and totaling all actual vehicle-related expenses, such as gas, oil, repairs, maintenance, insurance, tires, and registration fees.
Either method requires keeping accurate mileage records. For the standard mileage rate, the restaurant simply multiplies the total number of business miles traveled by the IRS per-mile rate. To deduct the actual costs, the restaurant would add up the costs incurred and then multiply the total by the percentage of total miles driven for business purposes.
Keep in mind that mileage for work is deductible, but mileage to commute to work is not. That principle also holds true for all travel-related expenses. To be deductible, the expense must be for business. If a restaurant owner flies to Orlando to attend a convention, for example, the airfare and cost of hotel nights are deductible. However, if the owner extends the trip three days to visit local theme parks, that part of the trip is not deductible. Also keep in mind that not all travel expenses are equally deductible. For instance, meals during the trip are typically only 50% deductible.
11. Entertainment
As with owners of other types of business, restaurant owners may incur expenses by hosting investors, suppliers, vendors, business professionals (such as marketing gurus), or other stakeholders in the business. Changes in tax laws mean that true entertainment expenses, such as concert tickets or a round of golf, are generally not deductible, although there are some exceptions, such as for team-building activities. And as with travel, meal expenses are 50% deductible if there’s a clear business purpose, such as:
- Negotiating the details and pricing of a catering contract for a large event.
- Negotiating better terms from a supplier.
- Exploring new business opportunities or collaborations.
- Fostering relationships with people, such as social media influencers or hotel concierges, who can help drive business to the restaurant.
- Networking with others in the restaurant business to share ideas.
To qualify for the deduction, restaurant owners must keep detailed records of the amount of the expense, the date and place of the entertainment, the business purpose, and the business relationship of the persons entertained.
12. Charitable Donations
The tax code encourages donations to charity, and restaurants are eligible to deduct some, but not all, charitable donations. Gifts — such as cash, cash equivalents (e.g., gift cards) and food — are deductible, but, as with most elements of the tax code, there are limits. First, the restaurant’s ownership structure (such as sole proprietorship or S corporation) determines the restaurant’s donation limits. Second, the IRS — not the restaurant — defines which receiving organizations qualify as a charity. Before deducting any donation, the restaurant must make sure the charity qualifies.
For restaurants, donating food is often the logical charitable choice. Thanks to the Tax Cuts and Jobs Act, restaurants may now deduct the original cost of the donated food plus half the profit the restaurant would have made had it sold the food. For example, if the restaurant bought a piece of fish for $5 and the menu price for the dish is $20, then the restaurant could deduct $12.50 [$5 + ($20 – $5 / 2)] when donating the fish. As with all deductions, restaurants must have accurate records to substantiate their donations.
One important caveat about donating any food, cooked or uncooked: Restaurants must be sure they comply with local health department regulations or else risk penalties.
13. State and Local Taxes
The tax code, along with fastidious bookkeeping, is intended to minimize the chances of being double taxed on the same income by state and local governments, in addition to federal taxation. To prevent this from happening, restaurants should deduct all the other taxes paid during the year from their income taxes. That includes:
- Property tax: If the restaurant owns the building or property it operates from, property tax paid is deductible. Current tax law limits property tax deductions on individual returns (though not on corporate returns), so the restaurant’s ownership structure is key.
- Sales tax: Rates vary by location, but whatever sales tax restaurants collect and remit is deductible.
- Liquor and alcohol taxes: Restaurants that serve alcohol typically pay additional taxes on the sale of these drinks. Alcohol may be subject to both state and local taxes, which is one reason the amount of tax paid varies widely.
- Use and excise taxes: These taxes are charged on the sale of certain items — such as prepared foods, sugary beverages, or disposable packaging — in some jurisdictions.
- Franchise taxes: In some states, franchise locations of restaurants are subject to franchise taxes.
- Occupancy tax: This is most often associated with hotels, but some places also impose occupancy taxes on restaurants; the tax is based on the number of occupied seats.
Finally, a reminder that — as noted in the discussion of deductible labor costs — the employer portion of payroll taxes paid are deductible.
14. Insurance and Professional Fees
Another deductible labor cost noted earlier is the premiums paid for employee health insurance, assuming a restaurant provides such benefits. The cost of other business insurance coverage is also deductible. That includes property insurance, liability insurance, and spoilage insurance (which protects perishable goods).
Insurance offers financial protection, yet sometimes restaurants need operational protection, too. Usually that entails seeking expert advice, such as from attorneys, outside accountants, or consultants. The fees a restaurant pays to such professionals are deductible.
15. Operating Losses
No one opens a restaurant to lose money, but it happens — especially when the restaurant is new. The silver lining is that operational losses may offer restaurants a tax benefit. Unlike almost all other tax reductions, which are reported on the same return as the income they offset, the “benefits” of financial loss are realized later. In simplest terms, a current year’s losses can be used to reduce the profits — and, therefore, the tax liability — in a future year. Before trying to take advantage of that tax benefit, experts urge restaurants to consult a tax expert to determine the best way to do it.
Using Tax Deductions to Lower Taxable Income
Deductions reduce restaurant tax liability by reducing taxable income. Although the specifics can be highly complex, the basic concept is to deduct the actual costs of running a restaurant from the revenue (or sales) brought in. That sounds simple enough, but actually doing it effectively demands a methodical plan and process. Here are the steps.
- Gather financial records, including income statements, expense receipts, bank statements, payroll records, and previous tax returns.
- Determine the total revenue generated by the restaurant, including sales of food and beverages, catering services, and any other sources of income.
- Identify and calculate COGS. Include the cost of all food, beverages, and other supplies used to prepare the meals sold.
- Add up all deductible operating expenses, such as labor, rent, and maintenance, as noted above.
- Deduct depreciation on capital assets such as kitchen equipment, furniture, and building improvements.
- Look for any applicable credits, such as the FICA tip credit and the Work Opportunity Tax Credit.
- Organize meticulous records of all transactions and expenses; accurate documentation is crucial for substantiating deductions.
- Complete the tax forms.
Optimize Your Tax Efficiency With NetSuite
Taxes are integrally tied to inventory, sales, expenditures, and other financial factors. It makes sense, then, that tax planning and preparation is much more efficient when restaurants can handle all of their financial needs using one system. NetSuite’s unified restaurant and hospitality management solution includes point-of-sale (POS) integration, franchise management, and other features that provide restaurant owners with important advantages. For example, a single source of data with role-based dashboards allows everyone from the back-of-house manager to the CFO to easily find the information they need to make smart decisions. Restaurants can also stop entering data twice (or more) by integrating financials, inventory, POS, customer relationship management, and employee data in a single place. NetSuite even offers a free online ordering system that allows restaurants to take unlimited orders with zero costs, fees, or commissions.
As a restaurant grows and possibly expands, NetSuite has products to grow with the restaurant. Those products include NetSuite Financial Management and NetSuite Cloud Accounting Software, which can be licensed separately or as core components of NetSuite’s flagship ERP system.
Few will ever claim that doing their taxes is fun, but restaurant owners who plan carefully and keep meticulous records can deduct many of their business costs, which, in turn, lowers their tax liability. Deductions can greatly improve the bottom line — perhaps enough to make the difference between loss and profit — and contribute to business growth.
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Restaurant Tax Deduction FAQs
Are restaurant expenses tax-deductible?
Yes, most expenses incurred by a restaurant are tax-deductible. These deductions can help reduce the taxable income of the restaurant, lowering the overall tax liability. It’s important for restaurant owners to keep detailed records and to consult with a tax professional to ensure compliance with IRS regulations and to get the maximum possible benefits.
What is the IRS meal deduction rule?
The IRS allows businesses to deduct certain meal expenses. These include meals consumed with investors, vendors, business professionals, and other stakeholders, provided that the conversation during the meal has a legitimate and documented business purpose. To qualify as a deduction, the meal must meet other criteria. For example, the expense must not be lavish or extravagant. Also, the expense must be properly substantiated with records, including the amount, time, place, and business purpose of the meal, as well as the business relationship of the person being entertained.
Are restaurant comps tax-deductible?
Yes, meals provided to employees during their work shifts are deductible if the meals are eaten on-site. Meals may be deducted either as a food cost or as an operational expense, but either option should be used consistently.
Are restaurant meals 100% deductible?
For tax years 2021 and 2022 — prime COVID-19 pandemic years — there was a temporary 100% deduction for business meals provided by restaurants. The standard 50% deduction rule went back into effect in 2023.