While restaurants are subject to the same income tax rules as other companies, the nature of the restaurant business leads to unique income tax issues and opportunities. By understanding all of a restaurant's tax obligations and potential strategies, restaurant owners can take appropriate steps to comply with tax rules and minimize their income tax liabilities.
Federal Income Taxes
Federal taxes represent a restaurant's largest income tax burden. Restaurants must pay federal income taxes on all income they receive at each location where they do business. This income includes not only in-restaurant dining income, but also other revenue-generating activities such as catering and investments. Depending on how a restaurant is structured for tax purposes, federal income tax returns are filed either at the end of the restaurant's fiscal year or at the end of the owner's own personal tax year. Restaurants earning income must make quarterly estimated federal income tax payments, or risk paying an end-of-year penalty to the Internal Revenue Service.
State Income Taxes
In addition to federal income tax, restaurants in most states will also need to pay state income taxes. Liability for state income tax depends on a business's tax structure: while more states charge a corporate income tax than charge a personal income tax, there are still a few states that do not tax restaurants for income earned at the corporate level. State income taxes are either progressive or flat, and vary considerably by state. Restaurants must pay state income taxes separately in each state that they receive income.
Tax Issues Facing Restaurants
Several tax issues faced by restaurants present unique challenges. For example, as restaurants frequently receive a great deal of cash, they must carefully track cash income to ensure that all revenues are reported to the Internal Revenue Service. Additionally, waitstaff at restaurants face their own income tax issues with respect to tips. Restaurants and their employees must each carefully account for tips, which are subject to their own special income tax treatment rules and can be difficult to track.
Restaurant Income Tax Reduction Strategies
Several tax planning strategies can help restaurants reduce their income tax liabilities. First, restaurants should seek all possible tax deductions. Some of these are straightforward: restaurants should deduct all equipment and advertising costs, as well as payments made to legal and tax advisors. Other deductions are more complicated, and may involve real estate financing and loan mechanics. Other tax reduction strategies include choosing the right business structure and making savvy year-end tax planning decisions.