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Taxes will always be one of the most significant impacts on your bottom line. You can keep more of your money by taking advantage of restaurant owner tax deductions and credits.
Best restaurant tax deductions
One of the most significant is the deduction for food and beverage costs. You can deduct the cost of the food and drinks you serve to customers as well as the cost of ingredients and supplies used to prepare those items.
Expenses related to property rent, office supplies, utilities, and other essential items and services can also be used to lower your tax bill, including the cost of business meals with staff or third parties.
Other deductions are:
- Advertising and marketing
- Mileage to get supplies and deliver meals
- Loan interest and leases for business vehicles
- Employee pay and healthcare costs
- Restaurant maintenance, remodel costs, and repairs
The employee retention credit (ERC) for restaurant owners
Perhaps the biggest opportunity for restaurant owners in the wake of the COVID-19 pandemic is the Employee Retention Credit (ERC).
This credit provides a refundable tax credit for eligible employers who retained their employees during the pandemic.
A small business of just five employees could claim more than $200,000, even if you didn’t pay that much in taxes.
Businesses can still claim the credit until around April 2025 by amending 2020 and 2021 tax returns.
To be eligible for the ERC, your business operations have been fully or partially suspended due to a government order related to COVID-19 or you’ve witnessed a considerable plunge in gross receipts in 2020 or 2021 compared with the same quarter in 2019. Businesses could qualify for up to $5,000 per employee per quarter the last three quarters of 2020 and $7,000 per employee per quarter in 2021.
To claim the ERC credit, don’t go it alone. Get the help of an experienced CPA with knowledge of how to legally get your maximum credit.
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Maximizing deductions and credits for restaurant owners
While many common deductions are available to restaurant owners, several ways exist to maximize those deductions and credits.
One strategy is to take advantage of accelerated depreciation for equipment purchases. This allows you to deduct the full cost of equipment in the year it’s purchased rather than depreciating it over several years.
Another strategy is to consider using a Section 179 deduction.
This rule allows you to deduct the full cost of qualifying equipment purchases in the year they’re made up to a certain limit.
Tax credits for hiring and training employees
As a restaurant owner, hiring and training employees is a significant expense. However, there are several tax credits available to help offset those costs.
For example, the IRS’s Work Opportunity Tax Credit (WOTC) provides credit for hiring employees from certain targeted groups, such as veterans and individuals with disabilities.
Similarly, the Federal Empowerment Zone (EZ) program provides tax credits for hiring employees who live and work in designated empowerment zones. These credits can be significant and help offset the costs of hiring and/or training new employees.
Energy-efficient upgrades and tax deductions
The Internal Revenue Code’s Section 179D permits tax deductions for energy-efficient commercial buildings, including restaurants. This rule applies to building upgrades completed on or before December 31, 2022.
Commercial building owners or designers who can demonstrate a 50% reduction in energy usage through upgrades to their heating, cooling, ventilation, hot water, and interior lighting systems can avail of a tax deduction of up to $1.80 per square foot.
Partial deductions of up to $.60 per square foot are also available for eligible measures. To apply for this tax deduction, there’s a requirement to use a qualified software program that tracks energy usage.
A list of eligible software for calculating energy savings is available for reference at energystar.gov.
Other tax tips for restaurant owners
Most restaurants fall under the category of small businesses, meaning they can consider all the small business tax deductions the IRS offers.
To qualify, expenses must be both ordinary and necessary. Deductions can be claimed by either taking the standard deduction or itemizing deductions.
There have been changes to the list of expenses for 2021 taxes, including the deductible mileage rate for business use of cars, the limit on interest expenses for business loans, and the deduction for net losses limited to $524,000 for married filing jointly and $262,000 for singles.
Deductions for business meals
Business meals are often held to discuss important topics and foster colleague relationships.
For small enterprises like restaurants, half of the amount spent on eligible food and drinks can be claimed as a deduction. The meal must be business-related, and the following paperwork should be kept concerning the meal:
- Where and when the meal took place
- Who were the people you dined with in terms of your business relationship
- How much the entire meal cost
- Save the receipt and make notes on the back regarding the particulars of the meal
Costs associated with business travel
Tax season is the ideal time to write off all expenditures associated with business travel, including airfares, lodgings, rental car costs, gratuities, dry-cleaning, meals, and so on.
Further details on the list of deductible business travel costs can be seen on the IRS website. Work-related trips should have the following criteria:
- The trip must be pertinent to your restaurant business.
- Travel needs to be outside the city or region where your business is based for a period longer than an ordinary workday and requires you to stay overnight.
- The trip must take you away from your tax home.
Purchasing business insurance is highly recommended to guarantee that your restaurant business is protected and can be deducted.
If you are using a portion of your primary residence to run your business, the expenses related to the renter’s insurance can be included as a home office deduction.
Costs for a home office
Recently streamlined IRS regulations mean self-employed entrepreneurs and freelancers can write off five dollars for every square foot of their residence used for business activities, but only up to a maximum of 300 square feet.
To be eligible, the workspace must be solely used for work purposes (i.e., it’s not possible to deduct the square footage of a dining room if the desk is only used for work during the day), and the house office must be primarily used for conducting business.
Supplies for the office are essential for the efficient operation of any workspace. Having the right materials on hand helps ensure tasks can be completed without interruption.
Within the year of purchase, you can declare any office supplies such as computers, printers, paper, pens, and any relevant software as deductions, as long as they are used for business objectives.
Also, you may be able to deduct any postage and shipping costs connected to the restaurant. Keep a record of the receipts for the office supplies for proof.
Phone and internet service costs
For businesses that rely on the phone and internet (and who doesn’t, these days?), these costs can be deducted.
Internet or phone used for a combination of business and personal use means only the amount used for business can be written off. For example, if 50% of internet usage was for work, half of the bill could be deducted.
Business investment and bank fees
Interest accrued from business investments and bank fees are two distinct yet related concepts.
When you borrow funds from a bank for your business operations, you will be charged interest on the loan. During tax season, the interest charged on both business loans and business credit cards can be deducted.
Additionally, expenses such as monthly service fees and annual credit card fees for your business bank account and credit card can be written off.
Depreciation of restaurant equipment
Depreciation is a term used to refer to the decrease in the value of a tangible asset over time.
Businesses commonly deduct depreciation for substantial investments that last for an extended period, permitting them to be reimbursed over the entire duration of the item’s use.
Working with a tax professional for your restaurant business
Navigating the complexities of the American tax system can be challenging, particularly for small business owners.
Working with a tax professional specializing in restaurant businesses can help you identify all available deductions and credits and ensure that you’re taking advantage of them to the fullest extent possible.
A tax professional can also help you stay updated on changes to tax laws and regulations that may impact your business. They can provide valuable advice and guidance on structuring your business to minimize your tax liability and maximize your savings.
Take advantage of tax deductions for restaurant owners
As a restaurant owner, keeping more of your hard-earned money is essential to the success of your business.
By taking advantage of tax deductions and credits, you can reduce your tax liability while providing valuable employee benefits and investing in your business’s growth.
And don’t forget to check your eligibility for the Employee Retention Credit (ERC) to see how it can help offset the costs of retaining your employees during the pandemic.
Being smart about taxes is essential to keep more of your hard-earned money.
Ensure you’re taking advantage of all restaurant owners’ tax deductions and tax strategies for your restaurant business, and consult with a tax professional to help you navigate the complexities of the tax system.
Doing so can minimize your tax obligations and maximize your income.Calculate your potential ERC credit.