Top 10 Tax Write-offs for Restaurant Owners

Running a restaurant can be challenging, especially given the increasing costs of ingredients and staff salaries today. At the same time, there can be no compromise in food quality or dining experience. To strike a balance between the two, restaurant owners are always looking for ways to save money, and one avenue can be legitimate tax deductions. Knowing what qualifies as a restaurant tax deduction can help owners save additional money. In this guide, we will look at ten common tax deductions that can improve the financial stability of restaurant owners. 

Why Restaurant Tax Deductions Matter 

Restaurants operate on tight margins, so even small shifts in expenses and tax obligations can result in significant increases in profits for owners. According to the National Restaurant Association, the average profit margin for this industry ranges from 3 to 5 percent, and this is why every deduction matters. 

How Strategic Write-Offs Can Boost Profit Margins 

Effective planning can provide legitimate tax deductions for restaurant owners and support compliance during IRS audits. When done correctly, it can convert regular expenses, like wages and rents, into tax advantages. However, the key is to identify deductible costs without cutting corners in your operations. Tracking expenses and maintaining records throughout the year can also increase write-offs and the resulting profit margins. 

IRS Rules Every Restaurant Owner Should Know 

Publication 334 of the IRS lays down the specific rules that every restaurant owner must know about tax deductions. It provides information about business income, expenses, and tax credits that can help any small business owner, including restaurateurs, save on tax deductions and file taxes. It also covers businesses that are owned and operated by spouses. 

Using this publication, you can understand and compute your taxes. Alternatively, you can take the help of experienced firms like Manay CPA to provide the possible maximum available restaurant tax deductions. 

A ground rule is that any expense must be ordinary and necessary for your operations to qualify as a deduction. An “ordinary” expense is one that is common and accepted in the restaurant industry—such as purchasing cooking ingredients or paying utility bills. A “necessary” expense is one that is helpful and appropriate for your business, even if not absolutely required—like investing in a reservation system to improve customer service or hiring a marketing consultant to increase visibility. It’s important to note that an expense doesn’t have to be indispensable to be considered necessary; it simply needs to contribute meaningfully to your restaurant’s operations. Below are the top ten tax write-offs that you can claim, provided you meet the qualifying criteria and have all the related records and transaction evidence. 

1. Food and Beverage Inventory Costs

The cost of ingredients is the single largest expense for restaurants. To meet these costs, the IRS offers deductions for the Cost of Goods Sold (COGS). For restaurants, this includes food, beverages, and packaging costs directly tied to menu sales. This cost is subtracted from your gross receipts while calculating your gross profit. 

To claim this deduction, sole proprietors must fill Part III of Schedule C in Form 1040. The resulting gross profit is then reported on Form 1040. Partnership firms and corporations must claim this deduction through Form 1125-A. Along with these forms, make sure to attach all receipts and records that support your COGS claim. 

2. Restaurant Equipment and Supplies

The cost of restaurant equipment and supplies can be fully deducted under Section 179. The qualifying items are: 

• New and used equipment used in kitchens, like ovens, refrigerators, freezers, dishwashers, stoves, and point-of-sale (POS) systems. 

• Furniture like dining tables and chairs that are used for serving food to guests. 

• Any computers that are used for operations. 

• Improvements made to the roof, heating, ventilation, security systems, fire protection systems, and interiors of an existing non-residential building before service was started. 

Note that there is a maximum cap for this category, and for 2025, it is $1,250,000. It is also limited to the total taxable income of your business, which means you cannot claim a refund through this deduction. 

3. Rent and Lease Expenses

The rent and lease expenses incurred by a restaurant are fully deductible as they are considered ordinary and necessary expenses for operations. IRS Section 162 lays down the rules for claiming these expenses, and includes: 

• It must be “ordinary”, which means it must be a common expense accepted in the restaurant industry. 
• The expense must be a necessary one for the restaurant to run its business. 
• The amount made must be reasonable according to the rents prevailing in that area of operations. 
• The deductions must be for the rent paid in the current year. 
• You must maintain proper documentation, including your lease agreement and payment receipts (such as bank statements, canceled checks, or electronic payment confirmations). Note that security deposits are not deductible, and advance rent payments are prorated for the current year.” 

Note that security deposits are not deductible, and advance rent payments are prorated for the current year. 

4. Utilities and Maintenance Costs

Any expenses that are deemed ordinary and necessary to run operations are fully deductible. This includes electricity, gas, water, trash removal, sewage, business telephone, and Internet services. Also, regular maintenance expenses incurred on HVAC systems, kitchen equipment, plumbing, and repairing the security systems are deductible. 

However, major upgrades like remodeling are not considered maintenance expenses. Rather, they are capital expenses that can be depreciated over many years, instead of claiming their deduction in a single year. 

As with all expenses, detailed records and receipts are necessary to claim these deductions. 

5. Employee Wages and Benefits

Labor costs are one of the biggest recurring expenses for restaurants. Also, this offers multiple deduction options, provided you maintain proper records. Salaries paid to full-time and part-time employees, including kitchen staff, servers, cashiers, bartenders, hosts, cleaning staff, and anyone else that the restaurant employs, qualify for deduction. Similarly, meals provided to employees during their working hours can be claimed as a deduction. Plus, health insurance and contributions to retirement plans are also deductible. 

One area where the employee benefits calculation gets tricky is the tips. This is something paid by a customer directly to an employee, and hence it is not a labor cost to the restaurant. That said, the IRS requires restaurants to withhold payroll taxes (Social Security and Medicare taxes or FICA) on the tips earned. This is why the restaurant can get FICA credit on tips, despite tips not being a direct expense to the restaurant. 

Important Update: The One Big Beautiful Bill Act (OBBA) and Tips 

In July 2025, the One Big Beautiful Bill Act was signed into law, introducing significant changes to how tips are taxed for restaurant workers. For tax years 2025 through 2028, employees and self-employed individuals in traditionally tipped occupations can now deduct up to $25,000 of qualified tips from their federal income tax. This deduction applies to voluntary cash or charged tips received from customers, including tips received through tip-sharing arrangements. 

However, it’s crucial to understand that this is a deduction, not an exclusion from taxation. FICA taxes (Social Security and Medicare) still apply to all tip income. The deduction begins to phase out for workers earning above $150,000 in modified adjusted gross income ($300,000 for joint filers). For 2025, federal income tax withholding will continue to apply to all tips throughout the year, and employees will realize the benefit of this deduction when they file their 2025 tax returns in 2026. 

For restaurant owners, this means you must continue to withhold payroll taxes on tips and can still claim the FICA credit as before. Additionally, new reporting requirements are being implemented, and employers will need to report qualified tips on Forms W-2 or 1099. The IRS has provided transition relief for 2025, so restaurants should work with their payroll providers to ensure proper tracking and reporting of tip income going forward. 

6. Marketing and Advertising Expenses

Marketing, advertising, and promotional expenses are deemed necessary for operations, as they are aimed at bringing in more customers. Hence, any digital ads, loyalty programs, signage costs, social media campaigns, and sponsorships are deductible. Even the costs of creating and hosting websites qualify if they promote the restaurant. Money paid for professional services related to advertising, like hiring a photographer for taking pictures of the food, a digital marketing agency or consultant for promoting the restaurants, and taking the help of any other related services, are also deductible. 

The following expenses are not deductible: 

• Lobbying costs. 
• Political contributions. 
• Business gifts. Deductions are limited to $25 per person per year. 
• Entertainment expenses. 
• Business meals with a client qualify for a 50% deduction, provided the costs are reasonable and not extravagant. 

7. Delivery and Vehicle Costs

Food delivery costs have become an essential part of a restaurant’s operations today. Restaurants that partner with delivery firms like DoorDash and Uber Eats can deduct the listing costs. Also, if they run any promotion through these apps, they are deductible under the marketing and advertising header. 

If the restaurant delivers food, the mileage costs can be claimed as a deduction. For 2024, the rate is 67 cents per mile, and for 2025, it is 70 cents. This rate covers oil, repairs, regular maintenance, depreciation, insurance, gas, and other expenses incurred for delivery. This is the standard mileage rate method. If personal vehicles are used, then the miles used for businesses alone are deductible. Tolls, parking fees, and commercial vehicle leases also qualify for deduction. 

Meticulous records are required to claim these deductions. 

8. Professional Services and Licenses

A rule of thumb for professional services and licenses is that they must be ordinary and necessary for operations. For example, paying money to an accounting firm for maintaining the accounts or payroll processing is deemed necessary and hence, deductible. Similarly, paying money to an attorney to handle a legal claim is deductible. 

Additionally, restaurants must also pay for licenses, like health permits, liquor licenses, food inspection and safety, and more. These recurring expenses are deductible. However, startup licenses can be amortized over several years, and not completely in the year in which the restaurant started operations. 

9. Insurance Premiums

Insurance premiums are another recurring expense that can be deducted from your gross income. Some common insurance premiums paid each year are: 

• General liability insurance: Covers third-party bodily injury and is applicable if the restaurant has vehicles for delivery. 
• Commercial property insurance: Protects from theft, storm, floods, and fire for the commercial property of the restaurant. 
• Workers’ compensation insurance: Required by most states. 
• Business interruption insurance: Safeguards against lost income due to foreclosure or unforeseen incidents like the COVID-19 pandemic. 
• Health insurance for employees: Only the premium amount paid by the employer. 
• Malpractice insurance or professional liability insurance protects against any malpractice or misconduct by employees. 

Any premium paid towards the above licenses is fully deductible. Note that premiums for personal health and life insurance policies of the owner are not deductible as a business expense. 

10. Technology and Software Expenses

When it comes to technology and software expenses, restaurants can either claim them as a single deduction in a year or amortize them over multiple years. These expenses include: 

• Purchase and maintenance of point-of-sale (POS) systems. 
• Creation, updating, and maintenance of websites and mobile apps. 
• Any SaaS tools used by the restaurant to promote its business or manage its operations. 
• Software subscriptions, paid annually or monthly. 
• Accounting software. 
• Reservation and scheduling tools. 
• Payroll processing software. 
• Internet and phone services are used for business purposes only. It must be prorated if shared for both business and personal use. 
• Subscription to online ordering platforms. 

It must be any expense that is necessary for the smooth functioning of the business. 

If you have further questions on these expenses or need help with classifying them, reach out to the experienced tax preparers at Manay CPA. 

Bonus Tip: Keep Accurate Records All Year Long 

Now that you know the different expenses that can be claimed as deductions, there are a few things to ensure a smooth tax preparation and filing experience. Besides understanding the likely deduction expenses and their categorization, you must keep detailed, accurate records of every transaction that has been done throughout the year. 

An efficient recordkeeping system is the basis for tax planning and to avail the maximum available deductions. In fact, the IRS recommends that you maintain records for at least three years, in case of any IRS audits or other discrepancies. 

Today, many restaurants are tapping into cloud-based platforms that store records in a secure location. The advantage of these platforms is that no additional capital investment or maintenance is required from your end. Some of these tools even generate periodic reports based on your records to give you an excellent idea of your financials. 

In addition to technology, reach out to experienced CPAs who specialize in taxation for small businesses. They stay on top of the changing IRS provisions and yearly limits, and compute your taxes accordingly. Partnering with such experts can help you focus on your core business while they help you get the maximum possible tax deductions. 

Final Thoughts: Save More with Smart Tax Planning 

To conclude, tax deductions can make a big difference for restaurants because of the low profit margins and high costs of ingredients, labor, and overhead. Understanding what expenses qualify for deductions and maintaining consistently accurate records are key to increased profitability. 

Though the IRS offers guidance and many publications for every deductible, restaurant owners may find it difficult to understand and implement them. Also, every business is unique, and this can lead to confusion about what expenses qualify under which category. 

This is where it helps to partner with an experienced CPA firm like Manay CPA. Its auditors are experts in guiding small businesses, restaurant owners, and international investors to get legitimate tax deductions to improve profitability without getting mired in legal battles with the IRS. They can also handle recordkeeping, payroll processing, and other services. 

Reach out to Manay CPA today for all your taxation questions and needs.