There are some things in life most of us wish could be 86’d, and tax season is undoubtedly one of them. But like it or not, it’ll be here before we know it, which means it’s time to start thinking about the associated bookkeeping and what you’ll need to get the most out of your filing. (Although, talk to any accountant, and this is really a point of focus to keep in mind all year long. See more on that below.)
We strongly recommend hiring an accounting professional to help file your taxes. Restaurants taxes are complex, and restaurants are also frequent candidates for tax audits. Accountants will help ensure you’re staying in compliance with the law and also help you navigate factors like tip income and sales tax, maximizing deductions, and potential tax credits, like the Work Opportunity Tax Credit (WOTC) and the FICA tip credit.
However, even before you meet with an accountant, there are some important considerations and actions you should take. We spoke with industry professionals to pull together a list of general restaurant-focused advice. Here are nine tax tips every operator should know.
Make record-keeping a regular routine.
One of the biggest mistakes you can make as a business owner is waiting until the end of the year to do your bookkeeping. Not only does this become a major time suck, but it prevents you from maintaining a clear, ongoing look at your income versus expenses – aka, your margins, the lifeblood of your business.
“Make it part of your normal routine or employ someone to help do that,” says Shon Norris, a principal of Gould Killian CPA Group. “Having accurate records helps restaurant owners run the business, and see the real payroll, food, and overhead costs.”
Set up a system that makes it manageable to diligently document records. (See “Invest in accounting software” below.) Then, each month, reconcile what you’ve recorded with what appears on your bank statements. Line by line, you want both statements to match, which may require taking care of any outstanding checks and cleaning up duplicate records. In the end, this helps prevent money from slipping through the cracks, including employee theft or fraud, and generally enables you to keep an eye on your cash flow.
“You never know when you’re going to need to make a business decision, and a lot of times you’ve got to do it quick, and without all of the information compiled, you can’t make the best decision,” says Kaz Unalan, a CPA and director of tax and business advisory services at GBQ.
Meticulously document your expenses.
A primary part of record-keeping is documenting all business expenses. Many can be used as deductions on your tax return to lower what you’ll have to pay, but that’s only possible if you can show proof.
We recommend discussing all of the possible write-offs with your accountant – there are a lot! – and potentially even printing off a list to keep handy in your office. A few to consider include mileage incurred from business vehicles, software/subscription costs, contractor fees, maintenance and repair costs, renovation costs, equipment purchases, insurance, professional service fees (including the fee for your accountant), employer-paid contributions to social security, Medicare, and unemployment, advertising expenses, Cost of Goods Sold, charitable donations, and the list goes on…
Your accountant will determine which of your expenses are eligible to claim against what you owe. When in doubt, always save the receipt or invoice. You’ll also want to save and show your accountant statements like inventory, sales, and payroll reports, and lease and insurance agreements.
Invest in accounting software.
Keeping track of every single invoice, report, and purchase is universally stressful, but accounting software makes it easier to stay organized and accurately track income and expenses. The best solutions integrate with point-of-sales systems, and also track inventory, create invoices, calculate sales tax, reconcile vendor and bank statements, and even price out recipes.
QuickBooks is a common starter software for many small businesses and makes for an economical and easy to use option. There are accounting software options that cater specifically to restaurants, too, like Restaurant365 and PlateIQ, often which include additional features to help tighten operations.
“At the end of the day, you want to get something in place so you’re not running out of an excel file,” says Unalan. “There's just so much change, with wage inflation, increased commodity costs, delivery charges – and all of these things you need to track.”
Have regular check-ins with your accountant.
Ideally, you’d have regular check-ins throughout the year with your accountant to inform them of upcoming business decisions. This allows you to discuss the tax implications ahead of time and plan accordingly.
“A lot of operator mistakes stem from not having an open dialogue with their tax professional – the best way we can add value is to be on the front end of things so we can help avoid pitfalls or give ideas to consider,” says Unalan. “For example, maybe the operator wanted a new location and just went ahead and signed the lease, but within the lease were incentives, like a tenant improvement allowance. We like to review those leases so there’s no unintended consequences from a tax perspective.”
Many accountants also offer consulting services and can help you work towards specific goals. Together, you’ll walk through the numbers to identify areas where you might be able to better control costs and/or maximize profitability. Look for an accountant who specializes or has experience in dealing with restaurant clients.
If you can’t swing regularly scheduled meetings, at minimum, plan for a year-end appointment in October, says Unalan. This gives you a few months to go over your business operations and discuss what actions might still be possible to lower your returns.
Plan out upcoming major purchases or renovations with your accountant to get bigger tax breaks.
Part of the discussions with your accountant should include upcoming plans for any major investments, like purchasing a new walk-in fridge or doing renovations to the dining room. In most cases, these costs can be written off, and sometimes it might make sense to wait on a purchase or move forward earlier.
“We look at, should we accelerate some expenses before the end of the year to get the taxable income down, or should we push some of those into the following year because we're in a tax bracket where we don't need any more expenses in this year and it will be more valuable next year?,” says Norris.
When an operator purchases a fixed asset, like equipment or company vehicles, or makes improvements to leased or owned property, there’s also “bonus depreciation” to consider. This is a tax incentive that allows a business to deduct a large percentage of the purchase price in the first year rather than write them off over the "useful life" of that asset. Naturally, this plays a role in the overall return, which makes it valuable to discuss in advance.
“Once we get to your year-end tax return, there's not much at that point, with a few exceptions, that we can do to change the results [of what you owe], which is why it’s important that we see where things are throughout the year,” says Norris.
Keep business and personal expenses separated with separate accounts and credit cards.
There are many reasons to make sure you’re not commingling business expenses with personal ones. But generally speaking, it’s just a cleaner way to do business. If you’re using a personal card for purchases, it’s very easy for those expenses to get muddied together with your business expenses.
“Most [accounting] software will download credit card transactions every month and make sure they're getting coded correctly,” notes Norris.
If for whatever reason you get audited by the IRS, separate accounts will also make it much easier to look back on your records and pull necessary documentation.
If you’re not sure you can afford employee benefits, talk with your accountant about the tax impact.
Just like with the wages and bonuses you pay to staff, many employee benefits costs are tax-deductible, too.
“Staffing is obviously a big concern right now, so looking at something that sets you apart from your competition, whether it's health insurance or a retirement plan, can be valuable to attracting staff, and those are also business expenses, just like purchasing food,” says Norris.
Talk with your accountant to get an idea of which benefits qualify and what the deductions might look like. In the short-term, it’s possible the savings might enable you to fit the benefits into your budget, and in the long-term, they could pay for themselves through increased employee retention.
Learn about the WOTC before hiring employees.
WOTC is a federal tax credit program that incentivizes employers to hire from target groups that have consistently faced barriers to employment, including qualified veterans, long-term unemployed individuals, food stamp recipients, ex-felons, and more. Employers can yield anywhere from $2,400 to $9,600 per worker in tax credits, depending on who’s hired. However, to receive the credits, timeliness is key.
There’s a paperwork process that must be completed and submitted to your state workforce agency within 28 days after the new hire's start date, which means you typically can’t wait until tax season if you want to reap the benefit. To learn more about how to apply for WOTC, click here.
Ask your accountant about the Employee Retention Credit (ERC) if you haven’t yet applied.
The ERC is a refundable tax credit that businesses can claim on qualified wages, including certain health insurance costs, paid to employees during 2020 and 2021, enacted as part of multiple COVID-19 relief packages.
“To me, it’s the number one item every restaurant should be looking at – most restaurants were negatively impacted by COVID and should review the eligibility for it,” says Unalan. “If you fully qualify for both tax years 2020 and 2021, the credit itself could be up to $26,000 per employee, so it can be a big number for restaurant owners.”
There are two ways to qualify. You must have experienced a full or partial shutdown due to COVID-19 related government regulations or meet a quarterly revenue decline threshold, proving a significant loss of gross receipts in 2020 or 2021 as compared to the same quarter for 2019. The rules vary upon the quarter in question, but your accountant will work with you to determine if you’re eligible.
The important takeaway – don’t assume it’s too late. You have until April 15, 2024 to file for a refund for 2020, and you have until April 15, 2025 to file for a refund for 2021.
Grace Dickinson is a reporter at Back of House. Send tips or inquiries to firstname.lastname@example.org.
[Photo courtesy Mikhail Nilov]