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Getting Your Books in Order: How to Prepare for Tax Season 2023

DISCLAIMER: This content is provided for informational purposes only and is not intended as legal, tax, accounting, or other professional advice. Remember, you are responsible for your own compliance with your own state, local, and federal tax laws, and regulations and you should contact your attorney or tax accounting professionals for specific advice as it applies to your business.

A healthy bottom line and a sweet profit margin are great ways to wave goodbye to 2022 and get 2023 off to a great start. With tax season upon us, maximizing tax deductions and reducing taxable income are key to increasing your restaurant’s profitability. We've put together a guide to help you get your books in order as the deadline approaches.

Cooking up a cunning tax-strategy

Income taxes are part of conducting business, and in the restaurant world, preparing your taxes is like gathering all the ingredients for a recipe, and mixing all the front- and back-of-house operation costs to craft a perfectly prepared dish that will be served to the IRS on a silver platter. (maybe not that dramatic, but you get the picture!)

As a restaurant operator, you know, there’s a lot more to running a successful operation than fashioning a beautifully designed dining space or creating a deliciously engineered menu. Restaurant ownership is one of the more physically demanding, profit-challenging, and competitive businesses there is.

The most successful restaurant operators pay as much attention to their record books as they do their recipe books. That’s why cooking up a cunning strategy that reduces your taxable income by maximizing deductions, thus sweetening up your bottom line, should be high up on your to-do list as tax season approaches.

You’ve worked hard to survive the last couple of years, and deserve to keep as many of your hard–earned dollars as possible.

An allowable tax deduction is a tax-saving measure that can reduce the amount of taxable income you report on your return. If you earned $2,000 of income within a given year and claimed a $200 deduction, for example, you’d only have to report $1,800 when filing Form 1040 or a business return.

While we strongly advise every small business owner to consult a professional to manage their tax organization and filing, we have put together a list of some of the most important, and sometimes overlooked, tax deductions for restaurants.

Allowable Tax Deductions for Restaurants

Costs of Goods Sold (COGS): This includes all of the items, inventory, and labor used to produce the meals you serve. And it’s not just the cost of raw ingredients, you can also account for indirect costs like oil and condiments, as well as food that is wasted, spoiled, or otherwise discarded.

Capital investments — Substantial purchases, like major kitchen equipment or the building housing your restaurant are included.

Kitchen appliances: This includes smaller appliances like wine refrigerators, blenders, toasters, juicers, food processors, espresso machines, etc.

Eating supplies and utensils: Everything from plates, bowls, cups, and glassware to utensils, paper products, cloth napkins, and condiment containers are also deductible.

Employee salaries, insurance, and other benefits: All employees and management staff, delivery drivers (employees only, not through 3rd party partnerships), dishwashers, parking attendants, etc. are included.

Employer Taxes (Payroll Taxes): This includes employer-paid contributions, including Social Security and Medicare, as well as federal and state unemployment taxes

Employee gifts: This includes gifts over $25 per person/year, celebratory meals, holiday parties, and team-building events.

Property rental costs: Includes costs to maintain the location of your restaurant

Maintenance expenses: Utilities, cleaning services, and property repairs are some of the deductible maintenance costs.

Restaurant Equipment: Tables, chairs, barstools, cash registers, computers, lighting, fixtures, window displays, restaurant decor, menus, office supplies, and other related items are deductible.

Professional Fees: This includes fees paid for accounting, bookkeeping, legal, and other professional services.

Property insurance, liability insurance, and other policies:This includes policies that protect your physical restaurant, employees, and customers.

Marketing and advertising expenses:

  • Cost for creating, promoting, and/or printing marketing collateral materials including coupons, flyers, direct mail, billboards ads, signage, and newsletters

  • Costs to design, develop, create, and manage a website, blog, and social media channels

  • Expenses incurred for television, radio, newspaper, magazine, and other advertising time and space, with the exception of political ads

  • Costs for creative services such as copywriters, bloggers, artists, photographers, and graphic designers

  • Social media management costs

Software: This deduction applies to software used to run your restaurant, including off-premise operations.

Sales tax — The total amounts of federal, state, and local taxes collected and paid to respective authorities.

Depreciation: Adjustment to the percentage of deduction allowed over time

Work Opportunity Tax Credit: If you employ workers in targeted groups, such as veterans or those who may have faced barriers to employment, you may be able to claim up to 40% of the first year’s wages up to $6,000

Contractor Costs: You may claim contracting fees of $600 and above.

Safe Harbor Renovations: The Internal Revenue Service provides a safe harbor method of accounting for taxpayers engaged in operating a retail or restaurant operation.

Restaurants may deduct the cost of remodeling or refreshing their locations by treating 75% of the qualified costs as an “ordinary and necessary” business expense.

This would apply to all costs associated with building an outdoor dining area, creating a designated delivery and pick-up area, or making any other changes or improvements necessary to comply with restrictions.

Interest: This includes the interest on a vehicle you lease or own, as well as the interest on facility mortgage or lease payments.

Business vehicle expenses: Mileage, maintenance, fuel, insurance, parking, and other costs associated with a car or truck used for business purposes are included.

Banking Fees: Any fees incurred as part of running your business, including ATM fees apply.

2023 is up and running, so now is the time to start hitting the books to prepare for tax season. Use this guide to keep track of all of your taxable expenses as they’re incurred, so when the tax man pays a visit, you’ll be prepared.

By Eileen Strauss


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