According to the National Restaurant Association, there are more than 1 million restaurants, 7 in 10 of which are single-unit operations. Restaurants employ more than 14.7 million workers, with 9 in 10 restaurants having fewer than 50 employees. It’s expected that 1.6 million new restaurant jobs will be created by 2027. These are heady statistics and indicate that many restaurant owners are small businesses; all are concerned with what they can write off to minimize the revenues that are taxed.
Tax Deductions for Restaurant Owners
Here are the top 10 tax deductions for restaurant owners:
The cost of wages, benefits, and employment taxes paid for managers, waiters, cooks/chefs, bartenders, dishwashers, and other restaurant employees usually is the biggest expense for restaurant owners. The costs are fully deductible. Also the cost of providing meals to employees on the premises is a tax-free fringe benefit to them, but the business can deduct the cost (whether this benefit is treated as part of the cost of food or a separate deduction category).
If a restaurant engages entertainers on a contract basis, the cost is also deductible. And there are no employment taxes. But the business must issue a Form 1099-MISC if an entertainer is paid $600 or more during the year.
On average, food costs for restaurants account for 35% of the annual budget. The costs are treated as “nonincidental material and supplies” (not inventory), which means that the cost is deducted in the later of the year in which the food is paid for or provided to customers. A general discussion on business expenses can be found in IRS Publication 535.
The cost of rent, utilities, office supplies (“incidental materials and supplies”), and other basic expenses aren’t unique to the restaurant industry are still fully deductible.
Smallwares consists of the following categories: glassware, flatware, dinnerware, pots and pans, table top items, bar supplies, food preparation utensils and tools, storage supplies, service items, and small appliances costing $500 or less. The cost of replacement smallwares can be expensed, rather than depreciated over time.
Paper or linen napkins? If a restaurant pays for a linen service that supplies clean napkins, tablecloths, aprons, or other items on a regular basis, the cost (essentially a rental fee plus the cost of items that are damaged beyond laundering) is deductible. Alternatively, the restaurant my purchase linens and laundry facilities to handle things in-house. In general, items with an expected life of more than one year must be recovered through depreciation, but a small business can opt to treat them as non-incidental materials and supplies up to $2,500 per item or invoice each year; they’re not included as assets on the balance sheet.
The cost of advertising in print, radio, or other media is deductible; there’s no dollar limit on this write-off. Also, if you maintain a website or app to advertise your restaurant and/or permit, the cost likely is fully deductible (although the IRS has not provided definitive guidance on this matter).
The cost of designing and printing menus is an ordinary and necessary business expense of restaurants; it is fully deductible.
Usually, the cost of capital improvements for commercial property is recovered through depreciation over 39 years. However, there is a special rule that allows qualified improvements to be deducted ratably over 15 years.
As a restaurant owner, you need to maintain insurance that protects the business from liability claims in case a patron is injured on the premises. Also needed is property insurance to cover the cost of tables, chairs, kitchen supplies, etc. that can be damaged or destroyed by a fire or other occurrence. Be sure that you also have spoilage coverage in case food spoils because of a power outage or breakdown in the refrigeration unit.
In addition to insurance, if the business buys a generator to keep food from spoiling during a power outage, the cost of the unit may be written off using first-year expensing and/or bonus depreciation. The rules for writing off the cost of capital equipment are in IRS Publication 946 (it has not yet been updated to reflect new rules for 2018).
If the restaurant uses a van or truck to deliver food to customers, some or all of the cost to purchase the vehicle and operate it may be currently deductible. The rules for deducting vehicle costs can be found in IRS Publication 463.
New 20% Deduction
As a bonus, there’s one more important deduction of note to restaurant owners who have pass-through entities. Starting in 2018, owners can deduct 20 percent of qualified business income as a personal deduction to reduce taxable income, which seriously reduces the effective tax rate they pay on their share of business income. However, there are various limitations that restrict restaurant owners from claiming this new write-off, and IRS guidance is needed to flesh out certain details about it.
If you are a restaurant owner, talk to your CPA or other tax advisor to see whether there are additional business expenses you can write off. Be sure to discuss the tax law changes that go into effect for 2018 and how these new rules will impact your write-offs.