A great profit margin and healthy bottom line is one fantastic way to shut the door on 2020 and move forward.
Let's take a look at 12 explosive tax deductions that can be a new life line for restaurants, and the people that manage them.
Making sure your restaurant is maximizing its deductions is just one other great way to increase the bottom line and keep the business healthy.
Here are 12 ways to do it, with a PDF at the end of 56 action-packed pages of IRS material outlining other deductions. We've tried to save you the trouble of reading through them all with these 12.
Explosive Tax Deductions for Restaurant Owners:
|Operating Expenses||Advertising Expenses||Driving Expenses|
|Leasing a Car||Buying a Car||Employee Compensation|
|COGS||Improvement and Equipment||Repairs|
|Charity||Small Biz Tax Deduction||PPP Loan Forgiveness|
You have three different type 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 are going to be costs tied directly to the amount of output you have. They're going to be more difficult to budget for, especially considering how much food prices can fluctuate given market conditions that you have no control of. Food is a great example of a variable cost.
- Semi-variable costs - in a restaurant, these are going to be things like labor because you have both salaried and hourly employees
But hey, guess what? Deductible.
Tracking your 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. 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.
According to the 2020 State of the Restaurant Industry Report, customers were craving comfort food. Which is not a surprise considering what business owners and customers had to deal with throughout last year and into 2021.
Now if you were advertising those comfort foods, you were probably killing it. The best part? You can deduct those advertising expenses. Yep!
You can deduct things like:
- Social Media Advertising
- Placing ads in print media like newspapers and magazines
Why not promote your business? It's probably cooking up something great. Share it with the world [and get a little tax break].
Do you have someone just hot-tailing your delicious platters to your customers? Chances are, you had either a delivery service or a driver buzzing your meals out to customers while they were 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 get an idea of how much you can deduct. This is the maximum amount allowed per mile. In 2021 it's looking like it's about $0.56 cents.
Now if you're curious if you can actually deduct trips back and forth from the restaurant, that's a no-no. Personal expenses are not allowable. Bummer dude!
Have you maximized your deductions?
Or could your bottom line be even better? Get a free analysis to find out.
Leasing or Buying a Car for Business Use
Well the pizza delivery boy can't possibly get there without some sort 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 vehicle and business use, watch out, because you can only take the percentage of the amount used of personal versus owned.
I'd probably recommend to lease it for the company, and leave it for the company. It's difficult to mesh this stuff out.
For buying the vehicle, it's a little bit different. You can depreciate the vehicle, but at least 50% of its use (miles) must be for the business.
Employee Pay and Benefits
For restaurants, labor and is the biggest expense, by far. But the best part? It's all expensable!
Check with your CPA to make sure your 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!
Cost of Goods Sold
How you calculate your COGS can greatly increase or decrease how delicious your restaurant looks like to an investor.
Mainly because it affects your gross profit.
And, unfortunately, it can be confusing for most to understand how to calculate and categorize what can be considered a cost of good sold.
However, once you've calculated it, you can use it as a deduction as well.
There are other costs associated with delivering a yummy dish onto someone's fork, as well. 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 your bookkeeper can really help you find those small details that can great improve your gross profit.
Improvements and Equipment
What didn't you change in your restaurant in 2020?
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, 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 really should talk with someone on how to do that. It can literally save you thousands of dollars.
Repairs and Maintenance
Alright, so here is the different between depreciating improvements and equipment versus repairs and maintenance.
You ready for it?
Repairs and maintenance that were done that don't actually increase the value of your property are going to be deducted in the year the expense occurred.
Or, in the case where you tried to fix the toilet and sink by yourself and instead ended up exploding water all over the place and had to call a plumber, that's deductible as well.
And apologize to your significant other for not listening to them in the first place.
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 the good vibes, bank some karma, and then take a tax credit.
Before you go and start giving away the farm, you have to talk with your CPA or bookkeeper on how you're structured (S-Corp, LLC, etc.) to understand what your donation limits are as well as 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.
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 qualified real estate investment trust (REIT).
So, it can be a pretty hefty penny if you're able to show off some of your real estate investments. Smells good, doesn't it?
Deducting Operating Losses
Deducting a net operating loss can be really complicated, so before I even step forward on this one, talk to your CPA if you have one.
It can be beneficial if you have more deductions than you actually have for taxable income.
And the best part? If you have a net operating loss one year, you can actually roll it into a different year to decrease tax burden.
That's right, sniffing out some better years from years' past!
Deducting Paycheck Protection Program (PPP) Loan Forgiveness
For one loan that was such a hot subject during COVID-19 stimulus packages, this one is really simple. If you had your PPP loan forgiven, there you go. That's your gift from the government.
There was a lot of confusion on the PPP loan forgiveness and whether those funds would be taxable income. At first, the money was to be non-taxable but you couldn't deduct the expenses you used the PPP funds for.
The government later clarified that the PPP loan forgiveness was not taxable and you could deduct those expenses, which was great news for everyone. However, some states decided that the loan forgiveness was taxable.
Here is a good article about the states that are taxing PPP loan forgiveness.
Tax deductions can be a lot more simple to find 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 can be for last year, and how much you can increase your bottom line in the future.
Alright, now that you have a really great grasp on some insance deductions for this coming tax year, here's 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.