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.
Main Taxes Restaurant Owners Should Be Aware Of
Restaurants are required to pay income taxes for the profit earned 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.
Employers of a restaurant are required to 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.
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.
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%.
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.
A restaurant’s cost of goods sold can be declared 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 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.
Keep in mind that everything a restaurant buys, that is considered an ingredient for a finished good that they’ll sell is considered an expense.
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.
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.
Tax Tips for Restaurant Owners
The best tip for restaurant owners is to track all transactions that’s relating to your expenses. A best practice for every business out there is to create an Excel sheet with all relevant information. The most relevant information to track are: Payee, Tax Identification Number, Vat/Non-Vat, Total Amount Paid, Input Tax, Net of VAT.
See example below of how you should be tracking your cash disbursements.
The main purpose of tax deductions is to reduce your total taxable income. For example, ABC Taco’s earned $10,000 for the year 2020 and is claiming $2,000 as a deduction. The reported taxable income will be $8,000.
The Importance of Tax Planning for a Restaurant
A restaurant’s worst nightmare is getting to tax season with a huge tax bill. Sadly, a lot of restaurant owners are not familiar with their own numbers and might make huge financial mistakes. To prevent this from happening, a restaurant owner should properly plan their taxes.
Tax planning is the analysis of your restaurant’s financial situation to achieve tax efficiency. In turn, tax efficiency is what we should be striving for as to not overpay taxes. As you continue to operate your restaurant, tax planning should be an ongoing process in order to always achieve a lower tax bill.
Components of Tax Planning for a Restaurant
The most important component in tax planning is the income of your restaurant. In order to pay taxes, a restaurant must be earning income.
The next thing you need to know when tax planning is the legal entity of your restaurant. How you set up your restaurant from a legal entity perspective will affect how much taxes you’ll pay. These are the legal entities that’s under Indian Law – Sole Proprietorship, One Person Company, Partnership, Private Limited Company, Public Company, Limited Liability Partnership. All of these legal entities have different rules in taxation. Choosing the right entity is one way to help lower the tax bill of your restaurant.
Another component of tax planning is what we’ve been mentioning throughout the article, maximize your tax deductions. The key to doing this is to keep track of your restaurant’s expenses. By doing so, it is a guarantee that your restaurant will have a lower tax bill.
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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