Building Your Business Business Taxes 10 Essential Tax Deductions for Restaurant Owners By Jean Murray Jean Murray Facebook Twitter Jean Murray, MBA, Ph.D., is an experienced business writer and teacher who has been writing for The Balance on U.S. business law and taxes since 2008. She has taught accounting, business law, and business finance at business and professional schools for over 35 years, has authored several books on saving money and simplifying your business, and was the owner of startup-focused company Emence Enterprises, LLC. learn about our editorial policies Updated on September 19, 2022 Fact checked by J.R. Duren Fact checked by J.R. Duren J.R. is a terms editor at The Balance, a role in which he focuses on providing clear answers to common questions about personal finance and small business. J.R. has more than 10 years of experience reporting, writing, and editing. As an editor for The Balance, he has fact-checked, edited, and assigned hundreds of articles. learn about our editorial policies In This Article View All In This Article Operating Expenses Charitable Donations The Work Opportunity Tax Credit Good Records to Prove Deductions Frequently Asked Questions (FAQs) Photo: Getty Images/gahsoon As you try to keep your operations going during this challenging period of health and economic crisis, you may be dreading tax season. But there’s actually an opportunity to save on taxes by finding deductions to decrease your business income. Here are some important expense deductions—and a tax credit—you can use to cut your tax bill. Key Takeaways In general, you can deduct a variety of your restaurant's operating expenses as long as they're considered ordinary and necessary for your company.You can deduct driving expenses for business-related activity, but you can't deduct the miles you drive during your commute.The qualified business income deduction can reduce your net income by up to 20%.Keeping good records of your business expenses is an essential part of being a responsible taxpayer. Operating Expenses Restaurants may deduct most business expenses, as long as they are “ordinary and necessary” for your business situation. Ordinary expenses are common and accepted in the restaurant industry, like expenses for kitchen supplies. Necessary expenses are helpful and appropriate for your restaurant, like expenses to promote your business to get new customers. Here are some typical deductions for restaurant operating expenses. Advertising Expenses You may have been doing a lot more advertising to drive business, and you can deduct those advertising expenses, which include signage, social media advertising, and promotions. Entertainment expenses aren’t generally deductible, but you can deduct the cost of entertainment sold to customers. For example, if you have a band playing while people are dining, you can deduct this cost. You can also deduct the cost of meals and entertainment at a local promotional event for your restaurant. Driving Expenses You can deduct driving expenses for your restaurant business, yourself, and your employees, including trips to buy food and supplies and driving to deliver meals. You can take the deduction using either the IRS standard mileage deduction or actual car expenses, whichever the IRS allows. But, you can only deduct the business use, not personal use of the vehicle. Note You can’t deduct costs for driving back and forth to your restaurant from home. That’s considered commuting, and it’s never deductible as a business expense. Leasing or Buying a Car for Business Use Did you buy a delivery vehicle for your restaurant? If you lease or buy a car to use for your business, you can deduct loan interest or lease payments. You can only deduct these expenses for the percentage of the expense that represents your business use of the car. If you buy a car for business, you can depreciate the cost (spread deductions out over time). You must use the car more than 50% of the time for business to depreciate the car. Employee Pay and Benefits Employee pay and benefits are a big portion of your costs as a restaurant owner. Fortunately, you can deduct: Employee pay, including bonuses, commissions, sick pay, and vacation pay Employee benefits, like health plans and life insurance coverage Cost of Goods Sold The cost of goods sold (COGS) is a critical deduction for your restaurant because it directly affects your gross profit each year. It’s also a tricky calculation for your tax return because the food and supplies in your inventory change daily. To calculate COGS for tax purposes, you’ll need to know your beginning inventory at the start of the year plus all your purchases for all the products you sell, and then minus your ending inventory. Note In your calculation, don’t forget to include storage, delivery costs, takeout containers, and merchandise you buy for resale (like cookbooks or cooking-themed gifts). Improvements and Equipment Upgrades and improvements to your restaurant (like adding a drive-through window or upgrades to your ventilation and air-conditioning systems) are considered capital improvements and they must be depreciated (deductions taken over several years).Equipment you buy for your restaurant also must be depreciated. Note You may be able to deduct amounts you pay for certain kinds of property up to $5,000 per item. Check with your tax professional on this. Repairs and Maintenance Repairs and maintenance expenses that don’t improve the value of your property can be deducted in the year the work was done. Improvements to the property, on the other hand, must be depreciated. In other words, you can deduct the cost to replace a broken window in the first year, but you must depreciate the cost of new energy-efficient windows. Qualified Business Income Deduction Restaurant owners (not corporations) may qualify for an additional 20% deduction on their business net income for the year. You may be able to take the qualified business income (QBI) deduction in addition to your normal business income, and it’s included on your personal tax return. Deducting Operating Losses If you had a loss from your business operations in a specific year, you may carry forward and you can take the loss to offset other income you may have for the year. Corporations can also take deductions on operating losses, but with different regulations. Charitable Donations You can donate food, gift cards, and other items to charities, but whether your business gets a tax deduction for your donation depends on your business type. Restaurant owners who pay business taxes through their personal tax returns usually can’t deduct these charitable donations unless they itemize deductions. Also, the charity must meet IRS requirements. If your restaurant is a corporation, the business can make charitable donations to qualified charities, with specific limits. The Work Opportunity Tax Credit This tax-saving measure isn’t a deduction, but it may be even more beneficial. The work opportunity tax credit (WOTC) is a tax credit, which means it can create dollar-for-dollar savings off your business tax bill. You can get the credit for hiring individuals from certain qualified groups of people who face significant obstacles to employment, such as veterans or ex-felons. Keep Good Records to Prove Deductions The burden of proof is on your business to prove your deductions. You don’t have to include your business records with your tax payments, but you must be able to show the documents to an auditor or inspector as proof of the deductions. Keep especially good records for business driving expenses, gifts, and for depreciating property. Frequently Asked Questions (FAQs) What can a restaurant write off on taxes? You can write off food costs for serving to customers, and costs for employees to prepare and serve the food. In addition, you can deduct costs that are ordinary and necessary for restaurants, like cleaning, takeout containers, costs for delivery to customers, and expenses for professional advisors. Most deductions have requirements and limitations, so get help from a licensed tax professional to learn more about write-offs. What does the IRS consider a restaurant? The IRS says that a restaurant is a business that “prepares and sells food or beverages to retail customers for immediate consumption.” It doesn’t matter if the food or beverages are consumed on the business’s premises. This definition of “restaurant” doesn’t include a business that primarily sells pre-packaged food or beverages that are not going to be consumed immediately, like a grocery store, beverage store, or convenience store. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. IRS. “Publication 535 (2021), Business Expenses.” IRS. “Publication 463 (2021), Travel, Gift, and Car Expenses.” IRS. “2021 Instructions for Schedule C.” IRS. "Tangible Property Regulations–Frequently Asked Questions." IRS. “Qualified Income Business Deduction.” IRS. "Publication 536 Net Operating Losses," Page 2. IRS. "Publication 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts," Page 1. IRS. "Topic No. 506 Charitable Contributions." IRS. "Instructions for Form 1120," Page 13. IRS. "Work Opportunity Tax Credit." IRS. "Notice 2021-25," Pages 3-4.