Restaurant owners beginning the year-end tax planning process face several payroll, credit and reporting requirements unique to the industry. The turbulence of unpredictable margins, volatile cash flow and (for some owners, including franchisees), the tax and liability considerations of multi-unit businesses, create an environment requiring deep knowledge and careful planning. Windham Brannon’s accounting professionals have collaborated with countless restaurant owners on year-end planning and would like to share our recommendations while also offering our expertise in working to maximize profitability and comply with all laws and regulations. As we explain in this article, our team believes restaurant owners can benefit during the year-end planning process through careful record-keeping, financial records and payroll report reviews, proper tax document collections from third-party partners and proper year-end calculations.
Year-end Financial Statement and Records Review for Restaurants
Owners can begin the year-end review process by verifying the business’ financial statements including profit and loss statements, balance sheets and cash flow statements to determine overall profitability, assets and liabilities and the availability of cash to cover expenses. Bank and cash accounts should also be reconciled.
Additionally, consider the following:
- Ensure revenue and expenses are accurately categorized by reconciling sales reports from the Point of Sale (POS) systems.
- Understand varying tax treatments at the state and local level for each kind of food service such as dine-in, take-out, third-party deliveries, catering and gift card revenue. Correct your miscategorized expenses and review cash and credit card expenses.
- Confirm that tipped wages and service charges are recorded.
- Calculate the prime cost by reviewing the cost of goods sold (COGS) and labor divided by total sales. The cost can be affected by certain deductions which can impact business profitability and tax liability.
Maximize Deductions and Take Advantage of Industry Tax Incentives
Section 179 of the IRS tax code allows certain restaurant businesses to deduct the full cost of qualifying kitchen equipment, POS systems and software in the purchase year. For certain large restaurants, bonus depreciation should be another consideration when planning. Restaurant owners should consider whether Section 179, bonus depreciation or standard MACRS depreciation makes the most sense. A cost segregation study for larger remodels and build outs can deliver generous, short-term tax deductions at year-end to improve cash flow.
Several food and beverage-related deductions are also available including spoilage, waste and breakages. Because prime cost plays a role in restaurant profitability, owners should find opportunities to increase COGS when possible. Inventory obsolescence and food spoilages can be treated as an expense, which can decrease reported profits and lower the business’ tax liability.
Finally, some restaurants may be eligible for a federal Work Opportunity Tax credit by hiring and retaining employees from groups that face acknowledged barriers to employment. The One Big Beautiful Bill Act (OBBB), which passed in July, has made the credit permanent.
Review Payroll and Labor Reports for Your Restaurant
Passage of OBBB means that careful payroll management is crucial, with mistakes potentially leading to inaccurate reporting and penalties.
Some year-end planning payroll recommendations remain the same. Conducting payroll record reviews of employee hourly tracking to accurately classify employees as exempt or non-exempt (most, such as servers and cooks, will be exempt) remains important, as does conducting regular payroll record reviews to ensure accurate wages and tax liabilities. However, there are also new OBBB considerations for 2025 including:
- Overtime payments: Eligible employees can deduct overtime pay from their income tax liability, but their restaurant employers still must report all overtime to calculate FICA tax. The individual deduction is available through 2028.
- Individual tip deduction: Employees can also deduct tips from their reportable income up to $25,000 a year, though employers must use tip income to calculate FICA tax. As with overtime payments, the individual deduction is available to employees through 2028.
- FICA tip credit extension: The OBBB made the existing FICA tip credit permanent. Restaurants can pay employees a lower wage (and pay less FICA), if tips bring employees’ pay rate at least to the level of the minimum wage. Employers must make up any difference to ensure employees meet the minimum wage threshold.
Due to changes introduced by OBBB, restaurants should carefully review Form 941 filings (Employer’s Quarterly Federal Tax Return), as part of year-end planning, as the form reports on federal income and FICA taxes withheld from employees’ wages (including tips).
Year-end Tax Planning for Restaurants: Contractors and Third-Party Delivery Services
- In addition to reviewing financial records and ensuring accurate employee classifications and tax liability, a restaurant also must address key year-end reporting and compliance requirements from non-employee contractors and third-party delivery services.
- Third-party vendors: Food delivery services, such as DoorDash and Uber Eats, manage customer billing and remit payments to the restaurants. These services must submit Form 1099-K to any restaurant to whom it pays at least $20,000 from 200 or more transactions during the year. (See our recent article on Form 1099-K)
- Non-employee contractors. A restaurant business must also collect a Form 1099-NEC from all nonemployee contractors paid at least $600 during the year including all reported income from the restaurant.
Additional Considerations
There are a few other important details for restaurant businesses to take into consideration, such as:
- Sales tax rate: Ensure the restaurant’s POS system and third-party delivery services use an up-to-date sales tax rate to ensure accurate tax reporting and payments for the year.
- Estimated tax payments and operating reserves: Restaurant owners should make timely required tax payments to avoid penalties. Whenever possible, owners should also contribute to a reserve account to help with future expenses.
- Other compliance requirements. While owners focus on year-end planning largely to determine the tax liability of the business, it is also a good opportunity to evaluate compliance with food safety, cleanliness and physical safety laws.
Wrapping Up Year-end Tax Planning for Restaurants
The year-end planning process represents a good stress test for restaurants to determine the effectiveness of their record-keeping; a detailed paperwork trail will be essential in the event of an IRS audit. For similar reasons, restaurants should also store critical business and financial documents such as contracts, payroll reports, sales summaries, expense receipts, tip reporting records and timecards in an organized, retrievable manner.
While compliance with the IRS and other federal, state and local regulations can be challenging, restaurant owners can achieve peace of mind, however, by choosing to partner with an experienced accounting firm that has deep industry experience. Windham Brannon has collaborated with many clients on year-end tax planning, and we take satisfaction in successfully navigating complex accounting and compliance issues while watching the client’s business grow. For more information, contact your Windham Brannon advisor today, or reach out to Andrew Jones.
