Restaurant Tax Deductions: Food Cost, Tips, the Liquor License, the Kitchen, and the Delivery Apps That Take Thirty Percent

Restaurants are the most complete small-business tax picture in one building, and the return follows the cost of goods sold. Food and beverage cost — the largest recurring line: food from broadline distributors and local suppliers, beverages (non-alcoholic and alcoholic — the liquor, beer, and wine purchased for resale), and the paper and packaging — expensed as consumed, with the inventory on hand at year-end (the walk-in, the dry storage, the bar) counted and the cost of goods sold computed as purchases plus opening inventory less closing inventory (the small-business method permits treating inventory as non-incidental materials and supplies, but a restaurant's inventory is material enough that the count is the standard practice, and the monthly count is the management tool that produces the food-cost percentage — 28 to 35 percent for most full-service restaurants, higher for steakhouses, lower for pizza — which is the number the business runs on); the distributor's rebates and the manufacturer's programs (income or cost reductions when received); the waste, the comps, and the staff meals (comps as a cost; staff meals provided on the premises for the employer's convenience — 50 percent deductible through 2025 and nondeductible for amounts paid after December 31, 2025 under section 274(o), whose 2025-law exceptions reach meals employees pay full value for and certain fishing operations, not restaurant staff meals — so the staff-meal share comes out of food cost). Labor and the tips: front-of-house and back-of-house staff on payroll (a server on the restaurant's schedule is an employee under every test; the "1099 server" is a misclassification the labor agencies pursue), with the tip credit against the minimum wage where the state allows it (the tipped minimum wage — a wage-and-hour rule, not a tax one, with the employer making up the difference when tips fall short), the reported tips as wages (the tips guide — reported to the employer by the 10th of the following month, income tax and the employee's FICA withheld from cash wages, the employer's 7.65 percent paid on the tips, Form 8027 annually for a large food or beverage establishment with the 8 percent allocation rule), the FICA tip credit (section 45B — a general business credit equal to the employer's Social Security and Medicare on tips above the amount needed to reach a US$5.15 minimum wage, claimed on Form 8846, with no deduction for the taxes credited; the credit restaurants most often leave unclaimed, and worth the employer's 7.65 percent on nearly all reported tips for staff paid US$5.15 or more in cash wages), the 2025 legislation's tips deduction for employees (an employee deduction of up to US$25,000 a year for 2025 through 2028, phasing out above US$150,000 of modified AGI, US$300,000 joint, for tips in occupations on Treasury's list — servers, bartenders, and the rest of food and beverage service among them — with the restaurant reporting employees' qualified tips and their occupation on the W-2), the service charges (an automatic gratuity on large parties is the restaurant's revenue, and the portion paid to staff is regular wages — not tips, not in the credit), the tip pooling rules (labor law), and the Work Opportunity Tax Credit for hiring from targeted groups (a credit restaurants with high turnover qualified for constantly and claimed rarely — Form 5884, with Form 8850 submitted to the state workforce agency within 28 days of the start date; authorized only for hires who began work by December 31, 2025, and lapsed for 2026 hires unless Congress renews it, possibly retroactively — so the 8850s are still worth filing). The kitchen and the dining room: the kitchen equipment (ranges, ovens, fryers, refrigeration, the hood — though the hood and its fire suppression are often building components, dishwashers, prep tables, smallwares) — 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, or MACRS over five years (asset class 57.0, per the IRS's restaurant matrix), with the de minimis election for the smallwares (pans, utensils, plates, glassware — replaced constantly; expensed under the election); the dining room build-out (walls, finishes, lighting, plumbing, the bar, the booths and fixtures) as qualified improvement property in a leased space (the leasehold improvements guide — bonus-eligible, the largest single election in a restaurant's opening year) or as the building's components in an owned one (a cost segregation candidate — the cost segregation guide); the furniture (tables, chairs, the bar stools — five-year restaurant furniture in the same class, or section 179). The liquor license — a section 197 intangible: a liquor license purchased from the state (where licenses are issued new) or from another licensee (where they are limited in number and trade at market prices — six figures in some jurisdictions) is a section 197 intangible amortized over fifteen years (the section 197 guide — the regulations name the liquor license, and section 197 covers it whether bought or obtained directly from the state and even if renewable indefinitely; only a separately acquired right with a fixed term under fifteen years falls outside, amortized over that term); the annual renewal fees are expenses; and a license sold with the restaurant is part of the purchase-price allocation (amortization recapture to the seller, a new fifteen years to the buyer). The revenue channels and their fees: dine-in (the POS and card processing fees — a percentage of every check, on their own line, never netted); takeout and online ordering (the platform's fees); the delivery apps (a commission of 15 to 30 percent of the order — the app's payout is net, and the restaurant books the gross sale with the commission as a cost, reconciled to the app's statements and the 1099-K; the reporting guide); catering (invoiced, with deposits as cash-method income when received); gift cards (sold now, redeemed later — cash-method income when sold; deferrable one year under the accrual method's advance-payment rule — the consulting revenue recognition guide; and the breakage — gift cards never redeemed — as income under the restaurant's method when the liability is derecognized); and the bar (with the pour cost as the beverage-side diagnostic, and the state's liquor-by-the-drink taxes where they apply). Rent and occupancy: the lease (often with percentage rent above a sales threshold — a cost that scales with revenue), the CAM charges, the property taxes and insurance passed through, the utilities (gas and power for a commercial kitchen are a real line), the waste and grease-trap service, the pest control, the linen service, the hood cleaning (the fire code requires it quarterly or semiannually), and the music licensing (the performing-rights organizations license every restaurant playing music). Licensing and compliance: the health department permit and inspections, the food manager and handler certifications, the liquor license's renewal and the server training the state requires, the fire marshal's inspections, the business licenses, and — for restaurants with patios — the outdoor permits. Insurance: general liability (foodborne illness, slips), liquor liability (dram shop — required by the liquor license in most states, and priced for the bar's share of sales), workers' compensation, property and business interruption, equipment breakdown (the walk-in that fails on a Friday), and the umbrella. Marketing: the website and online ordering, the delivery apps' promoted placements (a marketing cost separate from the commission), social media, the loyalty program, and the local advertising. Sales tax — the meals tax: prepared food is taxable in nearly every state, often at a rate above the general rate (a meals tax, a restaurant tax, a local hospitality tax layered on the state rate), with alcohol sometimes taxed separately, takeout and delivery taxed by the state's rules (delivery apps often collect and remit as marketplace facilitators — the restaurant confirms in writing which sales the app is remitting for), catering taxed with its own rules, gift cards not taxed at sale (the redemption is the taxable sale), and the ingredients bought for resale under a resale certificate while the smallwares and supplies are taxed at purchase. Entity and self-employment: a restaurant is not a specified service trade — the QBI deduction applies at all income levels (the restaurant entity guide). The bookkeeping: revenue by channel with each channel's fees on its own line and the apps' statements reconciled to gross; the monthly inventory count and the food-cost percentage; payroll with tips, the tip credit, and the FICA tip credit computed; the fixed asset schedule (kitchen, furniture, the build-out as QIP or building components, the liquor license on the intangibles schedule); the de minimis election for smallwares; the credits (Form 8846, Form 5884); the lease with percentage rent; licensing and inspections; insurance by policy; sales tax by channel with the marketplace facilitator confirmations. The errors: the delivery apps' net payouts booked as sales (the 1099-K won't reconcile and the sales tax audit will); the FICA tip credit unclaimed (the employer's 7.65 percent on every reported tip); the liquor license deducted in the year bought (a fifteen-year intangible); the build-out depreciated over thirty-nine years when it was QIP; the service charges treated as tips; gift cards ignored until redeemed; and the Work Opportunity credit's certification never filed.

Key takeaways

• Food cost is the number the business runs on — purchases plus opening inventory less closing inventory, counted monthly for management and at year-end for tax; comps are cost, staff meals nondeductible from 2026 (50 percent in 2025).
• Tips flow through payroll with the employer's 7.65 percent on them, Form 8027 for large establishments, and the FICA tip credit on Form 8846 — the credit most restaurants leave unclaimed; service charges are wages, not tips.
• The kitchen is equipment (section 179, bonus, de minimis for smallwares); the dining room build-out is qualified improvement property — bonus-eligible, the opening year's largest election; the liquor license is a fifteen-year section 197 intangible.
• Every revenue channel has its own fee line: POS and processing, online ordering, delivery-app commissions (book the gross, deduct the commission, reconcile to the 1099-K), catering deposits, and gift cards (income when sold under cash; deferrable one year under accrual).
• Sales tax on meals is layered and channel-specific — state, meals, local hospitality, alcohol — with delivery apps as marketplace facilitators for some sales (confirm in writing) and ingredients under a resale certificate.
• Not a specified service trade; the Work Opportunity Tax Credit rewards the turnover restaurants have anyway — for hires through 2025, pending renewal.

The restaurant's deduction file

Revenue by channel; each channel's fees on its own line; app statements reconciled to gross and the 1099-K. Inventory: monthly count; year-end count; food-cost and pour-cost percentages. Payroll: tips reported and through payroll; the tip credit against minimum wage; Form 8027; Form 8846 (FICA tip credit); Form 5884 (WOTC) with certifications; service charges as wages. Fixed asset schedule: kitchen, furniture, build-out (QIP or building), liquor license (15-year intangible). De minimis election for smallwares. Lease with percentage rent; occupancy costs; hood cleaning; music licensing. Licensing and inspections. Insurance (liquor liability). Sales tax by channel; marketplace facilitator confirmations; resale certificate. Gift card method. The app reconciliation and the FICA tip credit are the two items that move a restaurant's return most.

Worked example

A full-service restaurant with a bar grosses US$2.6 million: US$1.7 million dine-in, US$420,000 through two delivery apps (booked at gross, with US$118,000 of commissions as a cost, reconciled to the apps' statements and 1099-Ks), US$310,000 takeout and online ordering, US$170,000 catering (deposits as income when received). Food and beverage cost: US$840,000 (32 percent), computed from US$865,000 of purchases with the January and December counts; comps as cost, the staff-meal share carved out as nondeductible for 2026. Labor: 38 employees on payroll — US$390,000 of reported tips through payroll with the restaurant's 7.65 percent (US$29,800) paid on them; Form 8027 filed (reported tips at about 23 percent of the US$1.7 million dine-in receipts, well above 8 percent — no allocation); the FICA tip credit on Form 8846 — about US$29,000 for servers paid above US$5.15 in cash wages — claimed for the first time this year (the prior owner never had); nine late-2025 hires certified for the Work Opportunity credit on their 2026 first-year wages (2026 hires await a renewal). Equipment: a new range line and a walk-in compressor (US$48,000, section 179), smallwares (US$14,000 across the year, de minimis), the dining room refresh (US$95,000 of finishes, lighting, and booths — qualified improvement property, bonus depreciation), the furniture on the schedule. The liquor license, bought from a prior licensee for US$180,000 three years ago, amortizing at US$12,000 a year on the intangibles schedule; its US$3,200 annual renewal expensed. Gift cards: US$62,000 sold in December — income when sold under the cash method (the accrual method's deferral reviewed for next year as the program grows). Rent with percentage rent above US$2 million of sales, the hood cleaning, the music licenses, liquor liability insurance. Sales tax: the state's meals rate plus the city's hospitality tax on dine-in and takeout; one app remits as a marketplace facilitator and one does not (confirmed in writing — the restaurant collects and remits on the second's orders); ingredients under a resale certificate. Net profit lands in the low-to-mid six figures — an S corporation with the owner's salary from a general manager's market wage plus management (the entity guide). The restaurant next door booked the apps' payouts as sales, deducted its US$150,000 liquor license in the year of purchase, never claimed the FICA tip credit, and depreciated its build-out over thirty-nine years — four items the sale of the business surfaced when the buyer's accountant reviewed the returns.

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. In addition, employers are required to pay the employer share of Social Security and Medicare taxes based on the total wages paid to tipped employees as well as the reported tip income.” — Internal Revenue Service, Tip recordkeeping and reporting, https://www.irs.gov/businesses/small-businesses-self-employed/tip-recordkeeping-and-reporting

The IRS states: “You must generally amortize over 15 years the capitalized costs of "section 197 intangibles" you acquired after August 10, 1993. You must amortize these costs if you hold the section 197 intangibles in connection with your trade or business or in an activity engaged in for the production of income.” — Internal Revenue Service, Intangibles, https://www.irs.gov/businesses/small-businesses-self-employed/intangibles

Practitioner note

A restaurant's return is a food-cost percentage with a payroll running through it, and the two items that move it most are both about reconciliation: the delivery apps' net payouts that must be booked at gross with the commission as a cost, and the FICA tip credit that returns the employer's 7.65 percent on every reported tip and that most restaurants never claim. Our restaurant files count the walk-in monthly, run tips through payroll with Form 8846 attached, put the liquor license on the intangibles schedule for fifteen years and the dining room build-out on the depreciation schedule as QIP — because the buyer's accountant reads the returns before the sale, and every one of those errors is visible on the page.

See also: For related guidance, see restaurant estimated taxes: thin margins, the December gift card push, and the build-out year; 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 restaurant returns and bookkeeping — channel-by-channel revenue with fee reconciliation, inventory counts and food-cost reporting, tip payroll with the FICA tip credit and Form 8027, WOTC certifications, kitchen and build-out elections, liquor license amortization, gift card method selection, and layered meals-tax compliance. See pricing or book a call.