Cooking Up a Cunning 2025 Season Tax Strategy
- eileen strauss
- Feb 17
- 12 min read
As a restaurant operator, you know there’s a lot more to running a successful operation than designing a beautiful dining space or creating a deliciously engineered menu. Income taxes are a fact of life for every business owner. And in the restaurant world, gathering records for this annual ritual is like compiling the ingredients for a great recipe to the IRS each year.
With 2025 in full gear, now is the time to start hitting the books to prepare for tax season, so we've compiled this guide to help you get started.
What Are Restaurant Tax Deductions?
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 tax strategy that reduces your taxable income by maximizing deductions, thus sweetening your bottom line, should be high up on your to-do list as the season approaches. And though almost every facet of running a restaurant offers potential deductions, restaurant owners should be familiar with the rules governing what can and cannot be deducted to reap the maximum benefit and prevent an audit.
Restaurant tax deductions are expenses that can be subtracted from a business's taxable income, thereby reducing its overall tax liability. Some deductions like marketing expenses and insurance coverage apply to most businesses. Others, like ingredients, labor costs, and kitchen equipment are specific to the restaurant industry.
For tax purposes, the IRS defines a restaurant as an establishment in which the principal activity is preparing and serving food and beverages for customers. That definition is also stretched to include food outlets that only offer takeout service, food trucks, and bars that serve food. Businesses that sell prepackaged food, however, including grocery stores, liquor stores, and drugstores, are not included.
Sweetening Your Bottom Line
You’ve worked hard to build a successful business 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.
2025 Tax Deductions for Restaurants
Cost of Goods Sold (COGS)
Though food and beverages account for most COGS, they aren’t necessarily the only expenses. To identify other COGS items, the key word is “sold.” For example, to-go packaging, such as food containers and disposable cups and lids, is a tax-deductible COGS item because it’s part of what customers purchase and take with them. On the other hand, plates used in the dining room are not COGS items because customers aren’t buying the plates as part of the meal or, of course, taking them home.
Ancillary products that are directly related to the restaurant can be deducted as COGS. These are often branded products featuring the restaurant’s logo, such as coffee mugs or T-shirts, ready-made sauces, cookbooks written by the restaurant’s chef, and gift cards.
Operating Costs
While COGS includes costs that relate directly to what the restaurant sells, operating costs are all of the other expenses required for running a restaurant.
These expenses fall into three broad categories: fixed, variable, and semi-variable.
Fixed costs: These are expenses that remain the same regardless of whether the restaurant sells one burger in a month or 1,000. They include rent or mortgage payments, property and liability insurance, salaries, and property tax.
Variable costs: These costs are driven by how busy the restaurant is. As a restaurant gets busier, for example, the more cleaning supplies will be needed. It also stands to reason that the busier a restaurant is, the faster things break, become outdated, or need to be replaced. Variable costs include:
Depreciation for large kitchen equipment
Furniture
Tableware
Dining room equipment
Dining room decor
Menus
Entertainment
Work uniforms
Office supplies
Semi-variable: These costs are those with fixed elements that change based on the restaurant’s volume of business or the time of year. It’s common for restaurants to incur higher labor costs during busy holiday seasons, for example, than at other times of year.
Capital Expenses and Improvements
Expenses for capital improvements are substantial enhancements that increase a restaurant’s value, improve its efficiency, or extend its useful life.
Capital improvements include things like installing ramps or other features to make the restaurant more accessible to customers with disabilities, installing new outdoor signs to attract more business, or adding a drive-through pick-up window.
Not all capital expenditures are tangible. If intangible capital assets yield benefits to the business over time, the IRS considers them deductible. Startup costs, such as necessary paperwork and the legal fees attached to them; purchasing a URL and building a website; registering a trademark; and some licenses and permits, are examples.
In general, restaurants can realize the tax benefits of capital expenses only over time, either through depreciation (for tangible assets) or amortization (for intangible assets), according to IRS-approved depreciation and amortization methods.
Repairs and Maintenance
Unlike capital improvements, repair and maintenance costs are typically entirely deductible in the year in which they were incurred.
Repairs and maintenance are any expenses incurred to keep a restaurant’s existing physical assets in good working order. Replacing a part in a freezer or repairing tears in the dining room chairs would fall under this category.
Repair and maintenance expenses can be grouped into four categories:
Maintaining the building itself: paint, flooring, security, climate-control systems, and locks.
Maintaining the dining area: customer seating, the bar, waiting area, and restrooms.
Keeping the kitchen running: epair of major appliances, plumbing, gas or electric systems.
Keeping the food preparation and cleaning equipment working: routine maintenance, such as servicing of an ice machine, and emergency repairs.
Marketing and Advertising
In the highly competitive restaurant game, keeping customers coming through the door can be an ongoing challenge.
Restaurants can deduct advertising, such as flyers, coupons, newspaper and TV ads, ads on social media and online platforms, and SEO. Restaurants can also deduct the cost of professional marketing services, such as hiring a freelance writer to create menu descriptions or a professional photographer to photograph menu items.
The IRS requires that advertising expenses be “ordinary or necessary.” This means that they are common to the industry and helpful for the business.
Travel
Any trips made for running the business qualifies for a deduction. That might include driving to a local farmers market, taking an Uber to a restaurant supply warehouse, or flying across the country to attend a convention. Restaurant owners needn’t make these trips personally. Employees are often asked to drive to destinations to deliver meals, run errands, or shop for ingredients. These expenses are also deductible, provided the employee travels on behalf of the restaurant.
Several variables influence how a restaurant can claim these expenses. One option is for the restaurant to own or lease a car for the business to use. As long as at least half of the car’s use is for business, the loan interest or lease payment and depreciation is deductible. Of course, restaurant owners or employees can also drive their personal vehicles for business. In those cases, the mileage accrued during business use is deductible. Restaurants can calculate that deduction in one of two ways.
Standard mileage rate (simplest and most common method): Multiply the miles traveled by the standard rate determined by the IRS. For 2024, the rate is 67 cents per mile.
Actual cost method: This requires tracking and totaling all actual vehicle-related expenses, such as gas, oil, repairs, maintenance, insurance, tires, and registration fees.
Either method requires keeping accurate mileage records. For the standard mileage rate, the restaurant simply multiplies the total number of business miles traveled by the IRS per-mile rate. To deduct the actual costs, the restaurant would add up the costs incurred and then multiply the total by the percentage of total miles driven for business purposes.
Entertainment
Just like owners of other types of business, restaurant owners may incur expenses by hosting suppliers, vendors, or business professionals.
Changes in tax laws mean that true entertainment expenses, such as concert tickets or a round of golf, are not deductible, although there are some exceptions, such as for team-building activities. Meal expenses are 50% deductible if there’s a clear business purpose.
Charitable Donations
The tax code encourages donations to charity, and restaurants are eligible to deduct some. Gifts such as cash or cash equivalents (e.g., gift cards) are deductible, but, there are limits. First, a restaurant’s ownership structure, (i.e., sole proprietorship vs corporation) determines the restaurant’s donation limits. Additionally, the IRS defines which receiving organizations qualify as a charity.
For restaurants, donating food is often the logical charitable choice, and thanks to the Tax Cuts and Jobs Act, restaurants may now deduct the original cost of the donated food plus half the profit the restaurant would have made had it sold the food.
If, for example, a restaurant bought a pound of chicken breast for $5 and the menu price for the dish is $20, then the restaurant could deduct $12.50 [$5 + ($20 – $5 / 2)] when donating the chicken. In other words,50% of the profit that would have been made.
State and Local Taxes
The tax code is intended to minimize the chances of being double taxed on the same income by state and local governments, in addition to federal taxation. To prevent this from happening, restaurants should deduct all the other taxes paid during the year from their income taxes. That includes:
Property tax: If the restaurant owns the building or property it operates from, property tax paid is deductible. Current tax law limits property tax deductions on individual returns (though not on corporate returns), so the restaurant’s ownership structure is key.
Sales tax: Rates vary by location, but whatever sales tax restaurants collect and remit is deductible.
Liquor and alcohol taxes: Restaurants that serve alcohol typically pay additional taxes on the sale of these drinks. Alcohol may be subject to both state and local taxes, which is one reason the amount of tax paid varies widely.
Use and excise taxes: These taxes are charged on the sale of certain items, such as prepared foods, sugary beverages, or disposable packaging in certain jurisdictions.
Franchise taxes: In some states, franchise locations of restaurants are subject to franchise taxes.
Occupancy tax: This is most often associated with hotels, but some places also impose occupancy taxes on restaurants; the tax is based on the number of occupied seats.
Insurance Premiums
Having the correct insurance is key to maintaining the financial health of a business. And, fortunately, business insurance premiums are tax-deductible.
Here are some of the policies that usually qualify for a tax deduction:
Operating Losses
No one opens a restaurant to lose money, but it happens. One silver lining is that operational losses may offer restaurants a tax benefit. Unlike almost all other tax reductions, which are reported on the same return as the income they offset, the “benefits” of financial loss are realized later.
IOW, a current year’s losses can be used to reduce the profits and tax liability in a future year. Restaurants should however, consult a tax expert to take advantage of this dediction.
Home Office
If you operate your business out of a home office, you are allowed to deduct the cost per square foot of your dedicated office space.
According to the IRS, taxpayers who work from home can deduct $5 per square foot of space that is used as a home office, up to 300 square feet. That equals a maximum deduction of $1,500.
The home office deduction includes the cost of utilities, such as heat, electricity, and Wi-Fi, so those expenses can’t be deducted separately.
To qualify for the home office deduction, your workspace must have met the following three requirements:
The workspace has clearly defined boundaries. It should be a separate room or portion of a room. That means working from your bedroom doesn't count.
It must be the regular, or normal, place where you work. If you typically work at a nearby co-working space, but you work from your kitchen table occasionally, you probably couldn't claim the deduction.
You must engage in regular and important business from your home office. For example, phyisicans who sees patients in a hospital, but do paperwork and billing at home, cannot qualify for a home office deduction.
Office Supplies
Restaurant owners need certain items to keep their business running and the IRS allows small business owners to write off the cost of office supplies from their taxes.
Examples of office supplies that qualify as deductible business expenses include:
Printer paper
Markers, pencils, and pens
Computer software
Internet and Phone
The IRS will allow you to deduct the cost of your internet and cellphone plan from your 2024 federal income taxes. The only qualification is that your phone and internet use must be essential to your business’s ability to operate every day.
In addition, you can write off the cost of Wi-Fi that you have to purchase for work purposes, such as while traveling on a plane or staying at a hotel.
With this deduction, though, things get a little complicated when the phone and internet you use for work are also used for personal purposes. According to the IRS, you can only deduct the percentage of the cost that is used to conduct your business.
Continuing Education
If you took a continuing education course in 2024, you could deduct the cost from your taxes. Work-related educational expenses are tax-deductible for self-employed business owners if they meet these qualifications:
The program maintains or improves the skills necessary for your current job
You must legally take the course to keep your salary or job
The program can't be used to help you learn skills for a new trade or business
Business Vehicles
Business vehicles are a tax write-off. If your business vehicle doubles as your personal vehicle, calculating the deduction can be tricky.
For instance, self-employed individuals who drive their personal cars for business purposes may be looking to write off expenses from their hired and non-owned auto insurance policy. In this case, the deduction should be based on the amount of time you use the car for business purposes. Track each business-related trip you make and submit that mileage cost as your deduction. Another option is to use the standard mileage rate.
If the vehicle is used solely for business purposes and never used for personal travel, such as a work van, you can deduct 100% of the cost of operating and maintaining the vehicle.
Almost every car expense you can think of qualifies for the deduction, including:
Gas
Maintenance and repairs
Car insurance
Registration fees
Lease payments
Tolls
Parking fees
License fees
Retirement Plan Contributions
If you’re like many small business owners, you probably make 100% of your own retirement plan contributions. The IRS recognizes this and allows you to deduct your contributions from your income taxes if you have one of the following retirement accounts:
Roth IRA
Traditional IRA
Keogh plan
Solo 401(k)
Depreciation
If you own assets that are essential to your business operation, you might be able to write off the depreciation from your income taxes. Examples of depreciating business assets include:
Real estate (i.e. your office, if you own a commercial building)
Computers and electronic equipment
Machinery
Business use vehicles
Office furniture and appliances
For the 2024 tax year, small business owners can deduct a maximum of $1,160,000 in depreciation for qualifying assets. If you want to claim a depreciation tax deduction, you must file Form 4562 with your tax return.
When it comes to deducting depreciation, however, there are some restrictions. For example, you can only write off the depreciation for computers and cars over a five-year period. For furniture and appliances, you can write off the depreciation over a seven-year period.
Take Away
Maximizing profits in the restaurant industry requires more than just increasing sales; it also involves strategically managing expenses to minimize tax liabilities. One of the most effective ways to boost profitability is by maximizing tax deductions.
With their complex operations and numerous expenses, restaurants are in a unique position to take advantage of a wide range of tax breaks. From deducting costs related to food and beverage inventory to claiming deductions for wages, equipment, and building renovations, understanding and utilizing all available deductions can significantly reduce taxable income, freeing up resources for reinvestment and growth.
By cooking up a cunning 2025 tax season strategy, restaurant owners can keep more of their hard-earned dollars and ensure long-term financial success.
FAQs
What is the IRS meal deduction rule?
The IRS allows businesses to deduct certain meal expenses. These include meals consumed with investors, vendors, business professionals, and other stakeholders, provided that the conversation during the meal has a legitimate and documented business purpose.
Are restaurant comps tax-deductible?
Yes, meals provided to employees during their work shifts are deductible if the meals are eaten on-site. Meals may be deducted either as a food cost or as an operational expense, but either option should be used consistently.
Can restaurants claim tax deductions for employee wages and benefits?
Yes, restaurants can typically claim tax deductions for wages, salaries, and other employee-related expenses such as benefits, payroll taxes, and even meals provided to employees in certain cases. This includes tips that are part of employee compensation.
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.
By Eileen Strauss
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