Coffee Shop and Bakery Taxes: Food Cost, the Espresso Machine, Tips in the Jar, and the Wholesale Line That Changes the Sales Tax

A coffee shop is a restaurant built around a machine, and the return follows the cup. Food and beverage cost: coffee beans (a roaster's wholesale price — or, for a shop that roasts its own, the green coffee and the roaster's operating costs as cost of goods sold), milk and alternatives, syrups, tea, the pastries (baked in-house from flour, butter, sugar, and eggs, or bought from a wholesale bakery), the sandwiches and grab-and-go, and the paper goods (cups, lids, sleeves, bags — a large line for a to-go-heavy shop) — expensed as consumed with a year-end count of the stock (beans, dry goods, paper), and tracked as a percentage of sales (beverage cost is low — 20 to 30 percent — which is why coffee margins are good; food cost is higher); the waste (the day-old pastries, the milk that expires) is simply cost, and donated unsold food to a food bank may qualify for the enhanced charitable deduction for food inventory (cost plus half the markup to the shop's regular selling price, capped at twice cost — a shop that doesn't keep inventories can elect to treat cost as 25 percent of that price; limited to 15 percent of the owner's net income from the business, with a five-year carryforward; and claimed by the owner as an itemized charitable deduction, subject from 2026 to the 0.5-percent-of-AGI floor). The equipment — the machine and the ovens: the espresso machine (US$15,000 to US$40,000 for a commercial multi-group machine), the grinders, the brewers, the refrigeration, the ovens and mixers for a bakery (a deck oven, a convection oven, a sheeter, a proofer — five-figure items each), the display cases, the dishwasher, the point-of-sale system, and the furniture — section 179 (US$2,560,000 for 2026, phasing out above US$4,090,000 of purchases) or bonus depreciation (100 percent for property acquired after January 19, 2025) on purchase, with the smallwares (pitchers, tampers, sheet pans, utensils) under de minimis; a leased espresso machine (the roaster sometimes provides the machine in exchange for a bean purchase commitment — the machine is the roaster's, and the bean price includes it; no asset on the shop's schedule) is analyzed by the agreement's terms. The build-out: the shop's plumbing (the espresso machine's water line and filtration, the hand sinks the health code requires), the electrical for the ovens, the counters and the bar, the hood if the bakery needs one — qualified improvement property in a leased space (the leasehold improvements guide — bonus-eligible, the opening year's largest election). Tips — the jar and the card: counter-service tips (the jar on the counter and the tip prompt on the card reader) are the baristas' tips — the card tips are paid out through payroll (reported and withheld as wages, with the employer's 7.65 percent paid on them), the cash tips from the jar are reported by the employees to the employer (by the 10th of the following month — the tips guide) and included in payroll; a tip pool among the baristas is permitted (the labor law's tip-pool rules — the Fair Labor Standards Act bars the employer — owners included — and its managers and supervisors from keeping any part of employees' tips, so they can't share in the pool; state law may add limits); the FICA tip credit (section 45B) is available to a food and beverage establishment where tipping is customary — a coffee shop qualifies as a food or beverage establishment, but the credit applies only to tips above the amount needed to bring the employee to the US$5.15 federal minimum wage reference — for baristas paid US$5.15 an hour or more in cash wages, the credit covers the employer's 7.65 percent on all reported tips — and counter-service tips qualify, because the credit reaches tips received for providing or serving food or beverages where tipping is customary; the 2025 legislation's tips deduction for employees (the tips guide — baristas are on Treasury's list of tipped occupations, under fast food and counter workers, TTOC 107) makes accurate W-2 tip reporting matter to the staff. The wholesale line — the bakery's second business: a bakery that sells bread and pastries to cafés, restaurants, and grocers has a wholesale line — invoiced (net 15 or 30 — income when received under the cash method), with its own margin (lower than retail) and its own delivery costs (a van, a driver); for sales tax, wholesale sales to a business that resells the product are sales for resale — exempt with the buyer's resale certificate on file (the bakery collects the certificate from each wholesale customer; without it, the bakery owes the tax the state says it should have collected) — while the bakery's retail counter sales follow the state's food rules. Sales tax — food's many answers: prepared food (a heated sandwich, food sold with utensils or for consumption on the premises) is taxable in nearly every state, and a coffee drink usually is too — though some states, California among them, exempt hot beverages sold to go; bakery items sold without utensils for off-premises consumption are exempt as groceries in many states (a loaf of bread, a dozen bagels to go) and taxable in others; the rules turn on heating, utensils, eating facilities, and California's "80/80 rule" (if more than 80 percent of a seller's gross receipts are from food and more than 80 percent of its food sales are taxable, even cold food and hot coffee sold to go become taxable unless the seller separately accounts for them), with other states applying their own tests; so a coffee shop's point-of-sale system codes each item by its taxability and the eat-in or to-go choice where the state distinguishes. The rest: rent (with percentage rent in some retail leases), utilities (the espresso machine and the ovens run all day), the music licensing (the performing-rights licenses for background music), the card processing (a percentage of every small ticket — a real line; the per-transaction fees on a US$5 average ticket are proportionally large — on its own line), the online ordering and delivery apps (commissions as costs, booked at gross — the restaurant deductions guide), the loyalty program (a free drink is a price reduction), the health permit and the food handler certifications, the insurance, and the marketing. Entity and the QBI deduction: a coffee shop or bakery is not a specified service trade — the QBI deduction applies at every income (the coffee shop entity guide). The bookkeeping: sales by channel and by taxability; wholesale sales with resale certificates; food and beverage cost as percentages; the year-end count; payroll with card tips and reported cash tips; the FICA tip credit on Form 8846; the equipment and build-out on the schedule; processing and app fees as their own lines; sales tax by item category. The errors: cash tips never reported (the employees' problem, and the shop's for the employer share); the FICA tip credit unclaimed; wholesale sales without resale certificates; to-go bakery items taxed (or eat-in items not); the roaster-provided machine on the shop's schedule; and the processing fees netted.

Key takeaways

• Food and beverage cost decides the margin — beverage cost 20–30 percent, food higher, paper goods a real line — with a year-end count; donated unsold food may qualify for the enhanced food inventory deduction.
• The espresso machine, grinders, ovens, and cases are section 179 or bonus items; a roaster-provided machine under a bean commitment isn't the shop's asset; the build-out is qualified improvement property.
• Card tips run through payroll; cash tips from the jar are reported by the staff by the 10th — and the FICA tip credit on Form 8846 returns the employer's 7.65 percent on nearly all reported tips.
• A bakery's wholesale sales are sales for resale — exempt only with the buyer's resale certificate on file.
• Food sales tax turns on heating, utensils, eating facilities, and eat-in versus to-go — code every item by taxability in the point-of-sale system.
• Not a specified service trade; processing fees on small tickets are a real line on their own.

The coffee shop and bakery deduction file

Sales by channel and taxability; wholesale with resale certificates. Food, beverage, paper cost as percentages; year-end count; food donations. Equipment (179 / bonus); roaster-provided equipment excluded; smallwares (de minimis); build-out (QIP). Payroll with card tips and reported cash tips; tip pool rules; Form 8846. Rent, utilities, music licensing. Processing and app fees at gross. Health permit, food handler certifications. Insurance. Sales tax by item category and eat-in/to-go. The tip reporting and the wholesale certificates are the two lines that cost money when missed.

Worked example

A bakery-café grosses US$780,000: US$560,000 at the counter (coffee drinks, sandwiches, and pastries — the POS codes each item; the state taxes prepared food and eat-in bakery items but exempts to-go bread and whole cakes), US$160,000 of wholesale bread and pastries to eleven cafés and a grocer (each with a resale certificate on file — exempt), and US$60,000 of custom cakes and catering. Cost: beans at 24 percent of beverage sales, food at 31 percent, paper goods US$38,000, with a December count; US$9,000 of day-old bread donated to a food bank (reviewed for the enhanced food inventory deduction). Equipment: a new deck oven (US$42,000) and a second grinder, section 179; the espresso machine is provided by the roaster under a two-year bean commitment (the roaster's asset — no depreciation for the café); smallwares under de minimis. Payroll: eleven employees; US$48,000 of card tips paid through payroll and US$16,000 of cash-jar tips reported monthly by the baristas; the FICA tip credit on Form 8846 (about US$4,900 — the baristas all earn more than US$5.15 in cash wages). The wholesale van on actual expenses. Processing fees (US$19,000 — 3.4 percent effective on a US$9 average ticket) and a delivery app's commissions on their own lines. Net profit lands in the high five figures — a single-member LLC (the entity guide). A café across the street never collected resale certificates from its wholesale accounts — the state's audit assessed sales tax on two years of wholesale bread as if it were retail.

Official sources

The IRS states: “Employers are also required to withhold taxes (including income taxes and the employee's share of Social Security tax and Medicare tax) based upon wages and tip income received by the employee and must deposit these taxes.” — Internal Revenue Service, Tip recordkeeping and reporting, https://www.irs.gov/businesses/small-businesses-self-employed/tip-recordkeeping-and-reporting

The FDA states: “More than 3,000 state, local and tribal agencies have primary responsibility to regulate the retail food and foodservice industries in the United States. They are responsible for the inspection and oversight of over 1 million food establishments - restaurants and grocery stores, as well as vending machines, cafeterias, and other outlets in health-care facilities, schools, and correctional facilities.” — U.S. Food and Drug Administration, Retail Food Protection, https://www.fda.gov/food/guidance-regulation-food-and-dietary-supplements/retail-food-protection

Practitioner note

A coffee shop is a restaurant built around a machine, and its return has two lines that cost money when they're missed: the tips — card tips through payroll, cash-jar tips reported by the staff every month, and the FICA tip credit that returns the employer's share on nearly all of them — and, for a bakery, the wholesale accounts that are sales for resale only if the resale certificates are on file. Our café files code every item by its taxability, eat-in or to-go, keep the roaster-provided espresso machine off the asset schedule, and count the beans and the paper goods in December — because the state's sales tax audit reconstructs the wholesale line from the invoices.

See also: For related guidance, see the restaurant entity guide; and browse every small business tax guide, by situation.

Next step

Fairlight Accounting is a cross-border accounting and tax practice with a U.S. Tax Desk and a Canadian Tax Desk. Our U.S. Tax Desk handles coffee shop and bakery returns — food, beverage, and paper cost accounting, equipment and build-out elections, roaster-provided equipment analysis, tip reporting with the FICA tip credit, wholesale resale certificate compliance, food sales tax by item and eat-in or to-go status, and food donation deductions. See pricing or book a call.