There are a lot of factors that go into taxing a restaurant. Income, location, restaurant size, number of employees are some of the criteria where the government will look to levy taxes on the restaurant. Depending on these variables, the restaurant can shell out thousands of dollars per year just to pay their restaurant taxes.
Taxes are the source of income of the government. They utilize these taxes to develop infrastructure projects, provide healthcare and education, and other projects for the country.
In this article we will discuss the main restaurant taxes, tax deduction opportunities, restaurant tax process in different US states, and finally super-useful tax tips for restaurant owners.
Main restaurant taxes owners should be aware of
Income Tax
Restaurants pay income taxes for the profit they earn during the year. In India, there are two income tax laws that businesses can choose from.
Income tax comes in three brackets under the old laws – 5%, 20%, and 30%. See the table below to see the old income tax bracket.
Individuals and businesses can avail of a new tax law starting the year 2020. This new tax law has lower tax rates and zero exemptions. This new tax law is not mandatory as the business can choose when filing for the ITR.
Payroll Taxes
Employers of a restaurant should deduct payroll taxes from their employees. These payroll taxes usually include employee benefits such as Social Security, Healthcare, Housing loans (for other countries), among others. Paying for the benefits of the employees is how employers look out for them.
Service Taxes
This type of tax is an indirect tax that the government asks from service providers. In India, service providers whose sales exceed Rs. 10 lakhs during the financial year were liable to pay the service tax on the value of the service provided. It was set at 15% for transactions that occurred on or after June, 2016.
VAT
Value Added Tax is a system of indirect taxation on the sale of goods and services to final consumers. As a standard for every country, VAT registered businesses charge VAT on their sales (output tax) and recover VAT on their purchases and expenses (input tax). The tax authorities in your country will usually be the ones who’ll settle the difference.
Restaurant GST Bracket in India
There are 4 brackets for GST in India. It is structured to keep food items at a lower tax rate while luxury items at a higher tax rate. These brackets are classified under: 5%, 12%, 18%, 28%.
The GST on the restaurants in India are under different brackets depending on the type of restaurant it is. For restaurants that operate without an AC, the GST bracket is at 12%. For restaurants that operate with an AC and have a liquor license, the GST rate is 18%.
7 expenses with tax deductions restaurant owners need to know
Before going into tax deduction best practices, a restaurant owner must first be familiar with GST rates and brackets. Once you know which bracket you belong to, you can now focus on deducting everything you can from your taxable income to save for profit. Follow these tips to know how to reduce your restaurant taxes.
COGS
You can declare your restaurant’s cost of goods sold as an expense to lower your taxes. The most important of your COGS is your inventory. As a restaurant, make sure you include the cost of all your raw materials, shipping and packaging costs, and other costs to create your product. That means for any vendor that you purchase an ingredient from, you have to keep the receipt.
Marketing
Restaurants can use its marketing expenses as tax deductions to deduct from its gross income. To maximize the tax deductions on your marketing expenses, make sure to consider both your local and online marketing efforts.
Local marketing efforts should include your TV ads, radio ads, flyers, to name a few. Online marketing promotions include Facebook/Instagram ads, Google ads, and email marketing campaigns. Marketing plans can not only help your restaurant, it can also help lower your taxes.
Assets & Equipment
Aside from COGS, your restaurant assets and equipment are also tax-deductible. Make sure to compile a list of all the equipment you bought for your restaurant – oven, burners, chillers. Aside from the cost of purchasing these equipment, make sure to include all maintenance costs.
Retainer Fees
If your restaurant has an accountant, lawyer, or a food consultant on retainer, it is important to know that these expenses can be tax deducted as well. The restaurant can deduct the taxes of the permits they’ll obtain. This can range from your business permits costs to filing trademark names.
Cost of Labor
The salaries of everyone working for your restaurant are fully deductible because labor is an expense needed to operate the restaurant. These employees can be your chef, general manager, barista, or your dishwasher. Salaries take a huge portion of a restaurant’s expenses and any savings in taxes will help the restaurant.
In addition to their salaries, a restaurant can also claim expenses on the meals they give to the employees. Most restaurant owners aren’t aware of this rule so make sure to take advantage. Remember, as long as the restaurant is giving employees a benefit, it is costing the restaurant money and can be claimed as an expense.
The basic concept for restaurants is to carefully track all cash disbursements related to the business. It may seem daunting at first but working with an accountant or a lawyer to help with your restaurant taxes ensures accurate payment of taxes. With their help, they can also help you get all possible deductions for your restaurant.
Transportation
Did you know that if you’re using your own transportation to deliver goods at events, you can deduct either via kilometers traveled from and to the location or the actual expense incurred for driving. However, keep in mind that you cannot file both to reduce your taxes. It is important that you calculate which option will give you more savings on taxes. Lastly, once an option has been chosen, this will be used as the method for tax filing for years. Make sure you choose which option to use wisely.
Insurance
An additional tax deduction that can help restaurant owners is depreciation claims on insurance purchased for your employees. In addition to insurance for employees, restaurants can also claim depreciation on real estate insurance and vehicle insurance. It is important for owners to be diligent in claiming their insurance depreciation as every little saving can definitely help the restaurant.
How much taxes do restaurants pay in the USA?
In the United States, restaurants are required to pay taxes to the federal, state, and local government. The first thing that restaurants need to pay is the federal income tax for both business and personal. Next, you have to pay for your staff’s federal payroll taxes – around 3-12% of total salary.
In some states, restaurants might be required to pay unemployment taxes and disability programs for their employees. The amount will vary depending on state, industry, and rating. Lastly, restaurants usually pay sales tax to their local government. This amount varies by state. Alaska, Delaware, Montana, New Hampshire, and Oregon are states that do not levy sales taxes on restaurants.
Let’s go through the tax regulations in some states in the United States.
Maryland
All businesses in Maryland, including restaurants, are required to collect 6% sales tax and/or 9% alcoholic beverage tax whenever a taxable purchase is made.
Purchases made outside Maryland are also subject to the 6% use tax and 9% alcoholic beverage tax if it’s used in Maryland. The main purpose is to prevent local businesses from having a competitive disadvantage. Consumers getting a 6-9% discount on items outside Maryland will make them not purchase locally anymore.
Utah
Restaurants in Utah are subject to the full sales tax rate in the jurisdiction that it occurs. The average sales tax rate in the state of Utah is 4.95%. However, retail goods are subject to only 3% rate throughout Utah.
In addition, restaurants must also collect a 1 percent restaurant tax on all food and beverage sales. The restaurant tax applies to all food sales, both prepared food and grocery food. Bars and taverns in Utah are also subject to restaurant tax on food sales and beverages (including alcohol).
Illinois
Restaurants in Illinois are subjected to the statewide 6.25% sales tax rate. However, does it apply to food orders for takeout and delivery too? The state only taxes the delivery IF the delivery charge is not separately stated on the bill and if the customer does not have the option to pick up.
Virginia
Restaurants are authorized to levy taxes not exceeding six percent of the amount charged for such food and beverages.
Arkansas
The state has a higher sales tax for restaurants compared to others at 6.5%. In addition, county and city sales tax at 1% and 1.5%, respectively, are also levied. Lastly, a 2% hospitality tax is also included for a total of 11% sales tax in the state of Arkansas.
Ohio
The current state sales tax rate in Ohio is 5.75% plus local sales tax of up to 2.25%. This is the tax that restaurants need to comply with. With numerous local tax jurisdictions in the state, restaurants in Ohio have to be extra keen on collecting the correct sales tax amount.
7 tax tips for restaurants
Now it’s time to share restaurant taxes best practices to make sure you won’t lose money and will keep things organized from legal perspective at the same time.
1. Qualify for Work Opportunity Tax Credit
If you’re a restaurant owner who gives chances to minorities, you might be entitled to WOTC or Work Opportunity Tax Credit. These minorities are individuals who have difficulty finding employment and were discriminated in their previous workplace.
2. Deduct donations to organizations
Tax exemptions can be applied to restaurants that were created for a good cause. These causes include religious, scientific, charitable, or educational purposes.
3. Keep receipts of all your transactions
You can claim possible deductions through receipts. In addition, keeping your receipts can help verify information in getting a tax return. Lastly, if your restaurant gets audited by the IRS, it is important that you have your receipts to support your claims.
4. Stay up-to-date on the sales tax requirements
Every city, county and state does not have the same sales tax requirements. Make sure that you’re aware of these requirements for sales tax collections and filings.
5. Automate tax process
Use software and other tools to help automate your restaurant’s tax processes. Tracking income, expenses, bills, invoices and employee information will all be made easier with accounting software such as Xero or helpful tools like Microsoft Excel or Google Sheets.
6. Hire a Professional CPA
If your restaurant is having a hard time complying with tax requirements, reaching out to CPAs or firms might make sense for you. They’re extremely knowledgeable in all tax & accounting related information and they’ll just let you know what’s needed if a requirement needs to be submitted.
7. Choose the right legal entity
Make sure you do your research on the pros and cons of each legal entity – sole proprietorship, partnership, or corporation. Each of these entities will affect how much taxes you’ll pay differently.
Conclusion
Taxes are the only constant when operating a restaurant. The restaurant owner needs to be proactive when it comes to taxes. They should be on top of all the tax details listed above in order to save money. If you feel that it’s overwhelming, do not hesitate to hire a skilled accountant who’s knowledgeable on taxes. Remember that the restaurant can use the money that they saved on taxes for their operations.
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