Owning a restaurant is both challenging and rewarding. It can be difficult to keep up with the accounting and tax preparation demands of owning and operating any restaurant.

Cooke, Lavender, Massey & Company, P.C. provides accounting and tax preparation services to many types of restaurants, including franchises, brewpubs, fine dining restaurants, take-out restaurants, and many more. 

Whether you own one small bistro or several franchises, our team can make accounting and tax preparation one of the most manageable parts of owning a restaurant. We provide a variety of services, including:

  • Accounting
  • Bookkeeping
  • Payroll Services
  • Income Tax Preparation
  • Compilations

Unique Accounting and Tax Challenges Faced By Restaurants

No matter what type or size of restaurant you own, there are accounting, bookkeeping, and tax preparation challenges. 

Accounting for employees who earn tips in restaurants

Most restaurant employees receive tips as part of their pay. It can be challenging to account for tips from a payroll perspective. 

Employee tips totaling $20 or more in one month are subject to federal income and FICA taxes. Restaurant owners must gather information about these tips so you can include them on each employee's W-2 form. 

Calculating tip credit 

It is easy to overlook the tip credit when filing restaurant tax returns. Restaurant owners must pay taxes on the gratuities that their employees receive from customers. Restaurants typically pay federal minimum wage for tipped employees of $2.13 per hour, compared to $7.25 per hour for other employees. The federal tip credit helps to offset the employers FICA tax paid in excess of the standard federal minimum wage.

The owner can request the tip credit using IRS Form 8846. Owners who are eligible for the tip credit can save hundreds or thousands of dollars on their taxes each year. 

To qualify, the restaurant's employees must keep an accurate record of their daily tips, and the employer must keep an exact annual total. Our accountants can help restaurant owners keep accurate records of tips and assist with the calculation of the tip credit. 

Depreciation calculations for restaurants

Tax law is constantly changing, and it can be challenging to keep up! Restaurant owners do have some options for accelerating depreciation of capital improvements and other equipment purchases.

Cash-flow issues for restaurants

Understanding cash flow is critical for running a restaurant. Many restaurants are somewhat seasonal, especially those located in college towns or vacation destinations. Our accountants help clients navigate the volatility of seasonal income and the complications of running multiple locations. 

Restaurant inventory shrinkage

Restaurants must account for lost inventory from food spoiling and other challenges. Bars, brewpubs, and restaurants that serve alcohol should have controls in place to account for all the alcohol inventory. It is essential to prevent theft and deter employees from taking advantage of their employer. 

Accounting for and reporting meals and sales tax

Meals and sales tax are unique to the food and restaurant industry. The meals tax rate varies by county. We often complete and remit the appropriate tax forms and payments for our restaurant clients to relieve this burden. 

Frequently Asked Questions

While our clients in the restaurant industry ask many relevant questions about accounting and tax preparation, here are four questions that we hear most often.

There are many nuances to payroll and taxes that restaurant owners must navigate. The federal minimum wage for employees who earn tips is $2.13 per hour. Each employee earns additional money from tips. It can be complicated to track tip income and know what to do when an employee's wage and tips reach minimum wage ($7.25 per hour). Restaurant employers have unique reporting requirements for employee's W-2 and the quarterly Form 941 when employee tips and wages reach the federal minimum wage.
Restaurants benefit significantly from having an updated POS (point of sale) system that helps track inventory. POS software can also help you accurately track and report various federal, state, and local taxes. Restaurant owners should also complete periodic inventory counts so they can report an accurate inventory on their tax return. Keeping track of inventory throughout the year helps track shrinkage and spoilage. If your restaurant, brewpub, or bar serves alcohol, it's critical to ensure that all the alcohol is accounted for and sold correctly to prevent loss and theft.
When a restaurant purchases food, it should record that in cost of sales to receive a deduction. Therefore, if the restaurant donates unused food, it cannot receive another deduction for the value of the donated food.

Common Mistakes

Due to the complex nature of accounting and tax preparation for the restaurant industry, there are many common and costly mistakes we help our clients avoid.

Forgetting to take a tip credit

Unlike a tax deduction that reduces your taxable income, a tax credit is a dollar-for-dollar reduction of your tax liability.

Restaurant owners who are eligible for the tip credit can save hundreds or even thousands of dollars on their taxes each year. For example, if you qualify for a $5,000 credit and you owe $10,000, taking the credit will reduce your taxes by $5,000.

To qualify, the restaurant's employees must provide an accurate daily record of their tips, and the employer must maintain appropriate records.

Not optimizing depreciation deductions

There are many variable and limits to depreciation deductions to consider as a restaurant owner. It is essential to use the optimal depreciation methods to reduce taxable income. 

Improper accounting and reporting of sales and meals tax

This is a common mistake made by restaurant owners. It is crucial to track and report appropriate sales and meals taxes. Restaurant owners must report and pay the sales and meals tax each month. 

Overpaying personal property taxes for disposed fixed assets

There are often differences between property and equipment capitalized and reported for income tax return and personal property tax return purposes. Many localities do not have a threshold for what owners must report for personal property tax purposes but safe harbor thresholds can be used for income tax purposes.

Some restaurant owners purchase equipment and allow it to stay on their personal property tax return for years! In some cases, the equipment may still be on their personal property tax even if they no longer own the equipment. 

Our team reviews our clients' personal property taxes each year to ensure they are not paying personal property taxes on equipment they no longer own.

Determination of FTEs for compliance purposes

FTE stands for "full-time equivalent." It represents the number of working hours that one full-time employee works during a calendar year. 

The FTE figure determines whether or not an employer must provide health benefits in accordance with the Affordable Care Act. FTE determinations also help employers estimate the cost of labor. We help our clients determine whether they meet the threshold for being required to offer health benefits to their employees.