Can Restaurants Claim Tax Deductions for Food Spoilage?
Every restaurant handles a variety of food products, from raw produce and meats to canned goods. Regardless of the type of good, all food is perishable. This creates a significant risk for businesses that are unable to sell ingredients before they spoil, increasing food waste and diminishing profits.
However, by learning the different tax deductions and food spoilage reduction practices, restaurants can improve their profitability.
Is There a Tax Deduction for Spoiled Food?
While there is no actual tax deduction for food spoilage, restaurants can claim deductions on the total cost of ingredients they purchased. Restaurants can claim this deduction regardless of whether the food is ultimately sold or spoiled.
However, there are other ways businesses can maximize their deductions and savings-
Restaurants that donate their food before expiration can deduct the value of the goods' selling price. This allows C-Corporations to claim up to 10% of their taxable income and other businesses up to 30%.
Under the Protecting Americans from Tax Hikes Act of 2015, all companies can deduct up to 15% of their income if they meet donation requirements. Corporations are also allowed to claim two times the value or the full value of food plus half its profit margin.
Restaurants must consult their tax attorney to determine the best option for their business.
Sometimes inventory can arrive at a business damaged or even spoiled. If managers notice torn packaging, bruised produce, or anything that could potentially reduce the food's shelf life, they are allowed to refuse the delivery.
In this case, the supplier should add credit to the restaurant's account and remove the goods. These ingredients do not even have to enter the accounting or inventory process, saving the expense of spoiled food.
Spoilage as an Expense
Once food products enter inventory, the only way they can be removed from the books is through recording an expense.
Goods that exit a restaurant through sales are recorded as the cost of goods sold. However, ingredients that expire are also noted as an expense but are deducted from the restaurant's net profits. Accountants are responsible for recording credit to inventory and debt to the expense count.
While every restaurant will experience spoilage at one point or another, there are actions business can take to reduce food waste-
1. Use the FIFO Method - The first in, first out (FIFO) method makes sure the oldest inventory is used before new arrivals to prevent spoilage. This requires restaurants to label items' shipment and opening dates to ensure they are using ingredients in the correct order.
2. Monitor Temperatures - Refrigerated foods should be kept at approximately 40 F, while frozen goods should be kept at 0 F or below.
3. Improve Ordering Accuracy - Restaurants must monitor their demand trends to avoid overstocking items, as it can lead to increased spoilage. By maintaining minimum stock levels on-hand, businesses can reduce their food waste.
Deductions Restaurants Can Claim
There are many further deductions that restaurants can claim to save money during tax season, including-
The cost of ingredients is among the largest expenses restaurants incur. Food costs can make up nearly 35% of a company's overall expenses. These costs consist of various products, such as-
- Pre-packaged items
- Raw ingredients
- Canned goods
As previously discussed, the cost of goods also includes any food that expired before they were able to be sold.
Another significant cost in the restaurant industry is labor, as most businesses require-
- Kitchen Staff
Depending on the company, restaurants may need to subsidize employee benefits and taxes on top of labor wages. These expenses can be deducted, not including the profit that owners collect from workers.
Operating and Advertising Expenses
The cost required to perform daily operations can also be deducted, along with advertising expenses. Restaurant advertising expenses often include-
- Directory promotions
- Newspaper ads
- Digital promotions
While day-to-day operations vary from restaurant to restaurant, businesses can write off practically any expense that is necessary to perform mandatory processes, including-
- Office supplies
Restaurants can also write off the cost of meals provided to employees during their breaks, as long as it is not already claimed in the cost of goods or labor expenses.
Capital expenses include large investments restaurants make to improve their facilities and services, such as-
- Kitchen equipment
- Company vehicles
Typically, capital expenses include items that last longer than a year and do not need to be replenished regularly. These costs must be recorded as assets rather than written off at the end of the purchase year.
This enables restaurants to claim depreciation of assets. However, accountants must review the Internal Revenue Service (IRS) rules on how much depreciation they are allowed to write off each year.