12 Explosive Restaurant Tax Deductions for Owners

Explosive Tax Deductions for Restaurant Owners:

1) Operating Expenses

You have three different types of operating costs in a restaurant:

• Fixed Costs - the ones that pretty much stay the same month-to-month and aren't directly tied to sales. Things like rent or most of your utilities.
• Variable costs - these will be costs tied directly to the amount of output you have. They will be more difficult to budget for, especially considering how much food prices can fluctuate given market conditions you have no control over. Food is a great example of a variable cost.
• Semi-variable costs - in a restaurant, these will be things like labor because you have both salaried and hourly employees.

But hey, guess what? Deductible.

Tracking expenses can be difficult in a restaurant. There are a thousand cogs to the wheel, and there are only so many things you can do to manage them. I get it.

But the more meticulous your restaurant is in tracking and updating these expenses in QuickBooks, the more likely you'll be able to take a chunk out of your tax liability at the end of the year.

2) Advertising Expenses

According to the IRS, an advertising expense must be ordinary or necessary to be tax deductible. The average advertising expense for a restaurant is about 3% of its annual sales revenue.

We've seen it get around 6% in some cases, but it all depends on the owner's comfort, where they're at in the business life cycle, or whether they want to grow.

What is an ordinary advertising expense?

Ordinary expenses are often utilized in the food industry. One of the most popular methods for restaurants to advertise is through social media platforms like Instagram and Facebook.

TikTok is now emerging as one of the most influential platforms for younger people, and restaurants have taken notice.  A small survey of over 700 TikTok users showed that 36% of the respondents bought food from restaurants after finding the food on the apps to look delicious. That makes sense, right?

However, one thing that needs to be noted in this case is that the IRS requires detailed records of how digital platforms were used and that a restaurant has kept a trail of how the advertising relates to its business.

Even though digital advertising has skyrocketed and become commonplace versus traditional advertising methods, these are tax deductible. 

You can deduct things like:

• Signage
• Promotions
• Placing ads in print media like newspapers and magazines
• Sponsorships

Why not promote your business? It's probably cooking up something great. Consult with your bookkeeper and CPA to discuss how much you should spend on advertising, given your long-term goals.

3) Driving Expenses

Do you have someone just hot-tailing your delicious platters to your customers?

Chances are, you have either a delivery service or a driver buzzing your meals out to customers while they are still hot.

And the greatest part? You brought in more revenue and the cost of getting the food there can be expensed.

• Deliveries to customers
• Trips taken to pick up supplies or food

Utilize the IRS's standard mileage deduction to understand how much you can deduct. This is the maximum amount allowed per mile. In 2024, it looks like it's about $0.67.

Now, if you're curious if you can deduct trips back and forth from the restaurant, that's a no-no. Personal expenses are not allowable. Bummer dude!

 

4) Leasing or Buying a Car for Business Use

Well, the pizza delivery boy can't possibly get there without some type of transportation.

And if you leased one for him, you're on the right track.

You can deduct the cost of the lease as well as interest for the vehicle.

Now, when you start meddling with personal use of the business vehicle as well as business use, watch out because you can only take a percentage of the amount used of personal versus owned.

I'd probably recommend leasing it for the company and leaving it for the company. It's challenging to maintain accurate accounts of each.

5) Buying a Car for Business Use

It's a bit different when buying a vehicle. You can depreciate the vehicle, but at least 50% of its use (miles) must be for the business.

6) Employee Pay and Benefits

Labor is by far the biggest expense for restaurants. But the best part? It can all be expensed!

Check with your CPA to make sure you're exploring all the types of expenses you can create from what you're paying to your employees, but here's a small guideline:

• Employee pay, including bonuses, commissions, sick pay, and vacation pay
• Benefits like life insurance, health plans, or even 401(k) contributions
• All the taxes you pay to Uncle Sam when it comes to employment stuff

So what are you waiting for? Go hire 20 more people tomorrow!

You can also outsource your payroll, which can be even more helpful in opening up your time and creating more opportunities for tax deductions. 

Here is some additional content on small business health care tax credits and starting up a retirement plan tax credit.

If you are hiring contract labor, save yourself time and money by collecting the proper documentation, including form W9, as part of your hiring process. Then, issue a 1099 to deduct the cost of their services.

7) Cost of Goods Sold

How you calculate your COGS can significantly increase or decrease how delicious your restaurant looks to an investor.

Mainly because it affects your gross profit.

Unfortunately, it can be confusing for most to understand how to calculate and categorize the cost of goods sold.

However, once you've calculated it, you can also use it as a deduction.

Other costs are associated with delivering a yummy dish to someone's fork, including the costs of delivering supplies to you or even supplies you give a customer to complete the sale: containers for delivery, plastic utensils, etc.

Outlining this with your CPA or bookkeeper can help you find those small details that can significantly improve your gross profit.

 

8) Improvements and Equipment

What didn't you change in your restaurant this year?

Did you build a deck to seat customers outside of your establishment? Did you have to buy new tables and chairs for the patio?

What about extending the size of your building or installing a drive-up window for customers who didn't want to come in?

The good news is that all these things can be depreciated over several years. You can even depreciate equipment that you had to buy.

If you have never depreciated something in QuickBooks Online, you should talk with someone about how to do that. It can save you thousands of dollars.

9) Repairs and Maintenance

Alright, so here is the difference between depreciating improvements and equipment versus repairs and maintenance.

Are you ready for it?

Repairs and maintenance that didn't actually increase the value of your property will be deducted in the year the expense occurred.

Or, if you tried to fix the toilet and sink by yourself and instead ended up with exploding water all over the place and having to call a plumber, that's deductible as well.

And apologize to your significant other for not listening to them in the first place.

10) Charitable Donations

A double whammy. 

When you make a charitable donation by providing food or a service or even donating money or gift cards directly, you can create all kinds of good vibes, bank some karma, and then take a tax credit.

Before you start giving away the farm, you have to talk with your CPA or bookkeeper about your structure (S-Corp, LLC, etc.) to understand your donation limits and which organizations you can actually donate to.

So, before your restaurant starts saving the world, check with your financial team to make sure you're set up to start getting a little back when you do.

11) New Small Business Tax Deduction

20% of net income. Doesn't that sound awesome?

The Qualified Business Income Deduction allows you to take up to 20% of your qualified business income or QBI plus 20% of your qualified real estate investment trust (REIT). 

So, it can be a pretty hefty penny if you can show off some of your real estate investments. It smells good, doesn't it?

12) Deducting Operating Losses

Deducting a net operating loss can be really complicated, so before I even proceed, talk to your CPA if you have one.

It can be beneficial if you have more deductions than you have for taxable income.

The best part? If you have a net operating loss for one year, you can roll it into a different year to decrease your tax burden.

Conclusion

Tax deductions can be much simpler when your books are together, and you're talking with someone regularly about your finances.

So what are you waiting for? Outsource your bookkeeping or talk to your advisors to see how you can get started changing how profitable your restaurant was last year and how much you can increase your bottom line in the future.

Alright, now that you have a grasp on some instance deductions for this coming tax year, here are another 56 pages of IRS documents that will surely bore you to sleep, but may save you some money: https://www.irs.gov/pub/irs-pdf/p535.pdf.