It’s one of the two things you absolutely cannot avoid in life, but federal and state tax filing can be a source of stress for a restaurant owner beyond that of the average taxpayer. Accounting for all of your potential deductions is exponentially more complicated than when you file as an individual and making sure you’ve reported everything accurately is critical. And then you have to deal with the aftermath and its effect on your cash flow.
We strongly advise every small business owner employ a professional accountant to manage their tax organization and filing, but we have 10 quick tax tips for your restaurant to get started on providing a tax preparer what they’ll need to get you the best result in your quarterly filing.
Write off food and beverage costs.
This should be a no-brainer for almost any restaurant owner since food and beverage likely accounts for a third or more of your total expenses in managing your business. They are the key components for the product you sell, after all.
But be careful that you are deducting costs for everything possible. It’s not just the cost of raw ingredients for your dishes (direct costs like meats and vegetables) that is deductible. You can also account for indirect costs like oil and condiments, as well as food and beverage that is wasted, spoiled, or otherwise discarded. Write off costs as they are incurred, not as the food is consumed.
Restaurants have a “safe harbor.”
The Internal Revenue Service’s Rev. Proc. 2015-56, 2015-49 I.R.B. 827 provides a safe harbor method of accounting for taxpayers engaged in the business of operating either a retail establishment or a restaurant (“Safe Harbor”).
Retail and restaurant businesses may be able to deduct the cost of remodeling or even “refreshing” their locations by treating 75% of the qualified costs paid in a remodel as an “ordinary and necessary” business expense, with the remaining 25% capitalized and depreciated over time as costs for improvement to a qualified building. The remodel or refresh must be of larger scope than just a new paint job or cleaning regimen, however. Those two items are already considered deductible expenses.
Don’t miss deducting employee benefits.
It’s not just employee salaries that you get to deduct as an expense. The cost of every meal you provide your wait staff or kitchen crew is tax deductible as well. Paid sick leave, vacation pay and health (and any other form of) insurance are also expenses that you can deduct, as the employer. Just be careful.
As an owner, your own deduction is not so clear cut if you are taking a regular salary. The IRS excludes profit generated by the restaurant and paid to the owner as a tax write-off in most cases.
Oh! And mileage.
Do you drive for your business? Do any of your employees drive as part of their work tasks? This deduction is one which needs to be tracked very carefully but is well worth the effort. Just make a habit of marking down mileage as you make deliveries, travel for catering events, or pick up supplies.
It’s strongly recommended that you do so in a formal ledger or smartphone app designed for mileage tracking so that everything will be ready for your accountant when they need it.
Make use of the Work Opportunity Tax Credit.
A deduction some business owners may not even realize they qualify for, the Work Opportunity Tax Credit (WOTC) rewards employers for hiring individuals from certain target groups that have historically faced barriers to employment and discrimination in the workplace.
These can include: former felons, unemployed veterans, recipients of Food Stamps, or other public assistance, residents of Empowerment Zones, individuals referred by vocational rehabilitation services, and more. It’s an easy way to earn an extra credit on your federal return in the process of hiring new employees.
Count up your charitable donations.
Just like on an individual tax return, business owners are able to deduct their donations to organizations with 501(c)(3) status (with few exceptions as detailed by the IRS), whether it involves cash or an activity hosted on their behalf.
Take caution in what you itemize, however, as not everything you donate is actually deductible. The cost of food provided is certainly deductible, but staff time or the full cost of services as charged to the public is not. Some enhanced deductions are available specifically for restaurants, though.
The Section 179 deduction is here.
Only temporary until 2016, there is now permanent tax deduction for equipment purchases for small businesses. The new wrinkle in Section 179 of this law? Certain large capital investments, which could previously only be depreciated over a number of years, can now be taken as a lump sum deduction in the year of the purchase.
The break is meant to make it easier on cash flow for small businesses to buy up to $500,000 worth of qualifying equipment — including computers, vehicles, furniture, and kitchen appliances.
Use the 8 percent rule on tips.
This is the Internal Revenue Service’s estimate on tipping amounts in restaurants in the United States. While it seems standard in 2018 to tip somewhere between 15 and 25 percent, for the purposes of reporting income, the IRS errs on the side of caution with 8 percent when tips are not fastidiously accounted for.
It is contingent on the business owner to deduct 8 percent of the employee’s sales each pay period in cash circumstances and to rely on much more accurate reporting through your POS system on credit card tipping.
And don’t forget Form 8027 is due.
Titled the “Employer’s Annual Information Return of Tip Income and Allocated Tips,” IRS form 8027 is due at the end of February for any restaurant owner who files in paper form, with an extra month afforded to those who file electronically. It’s also a good time to brush up on tax obligations regarding the reporting of tips with your current staff. This form requires the presentation of gross receipts and accurate accounting, so everyone needs to be involved to make sure the process goes smoothly.
What if I get a letter?
Don’t panic. There are a lot of reasons the IRS may contact you after you have filed your tax return. You could have a balance due, but you could also have an adjustment to your refund owed. More often than not, however, it’s just that information needs to be confirmed or provided that was overlooked on your initial filing.
Read the request carefully and respond with the material being asked for, consulting your tax accountant or attorney beforehand if any part of the request concerns you. No matter what, make sure you include the notice (CP) or letter (LTR) number on all correspondence back. It will keep all communication grouped correctly in the IRS system.
Worried about cash flow as tax time approaches? We have a free eBook to help you sort out your needs, titled “What’s Eating into Your Restaurant Profit (and How You Can Improve Your Cash Flow).” Get it today!
Rewards Network® does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction
