Five Key Changes Impacting Restaurant Tax Returns in 2025

The restaurant industry faces constant shifts, but tax regulations are evolving faster than ever. For restaurant owners and managers, understanding the tax changes coming in 2025 is essential to avoid surprises and optimize financial outcomes. This article breaks down five major updates that will affect how restaurants prepare and file their tax returns next year. Knowing these changes early helps businesses plan better, reduce risks, and take advantage of new opportunities.

1. New Rules on Employee Retention Credit (ERC)

The Employee Retention Credit, introduced during the pandemic to support businesses keeping employees on payroll, is undergoing significant changes for 2025. Restaurants that claimed ERC in previous years must carefully review updated IRS guidance to ensure compliance.

• Reduced eligibility: The IRS has tightened criteria, limiting which wages qualify for the credit.

• Documentation requirements: Restaurants must maintain detailed records proving eligibility, including payroll reports and proof of revenue decline.

• Interaction with other relief programs: Businesses that received Paycheck Protection Program (PPP) loans need to verify how ERC claims affect loan forgiveness.

  
  

For example, a mid-sized restaurant that claimed ERC in 2021 must now revisit its records and possibly amend returns if documentation falls short. Failure to comply could trigger audits or penalties.

2. Changes in Deductibility of Business Meals

Business meal deductions have been a valuable tax break for restaurants and their clients. However, 2025 brings new limits and clarifications:

• 50% deduction cap remains: The IRS continues to allow only half of the meal expenses to be deducted.

• No deduction for lavish meals: Expenses deemed extravagant or not directly related to business are disallowed.

• Clearer definitions: The IRS provides more examples of qualifying meals, including client dinners and employee meals during overtime.

  
  

Restaurants hosting frequent client meetings should track meal expenses carefully and separate personal or non-deductible costs. For instance, a restaurant that regularly bills business meals to clients must ensure these meet IRS standards to avoid disallowed deductions.

3. Updated Reporting for Tips and Gratuities

Tip income reporting has always been complex for restaurants. In 2025, the IRS is enforcing stricter reporting rules to reduce underreporting and tax evasion.

• Mandatory electronic reporting: Restaurants must use approved electronic systems to report tip income.

• Increased audits: The IRS plans more frequent audits focused on tip reporting accuracy.

• Employee education: Employers are encouraged to train staff on proper tip reporting to avoid penalties.

  
  

A small restaurant using manual tip tracking may need to invest in new software or systems to comply. This change aims to improve transparency and ensure employees report all tip income.

4. New Limits on Net Operating Loss (NOL) Carrybacks

Net Operating Losses allow restaurants to offset profits with past losses, reducing tax bills. The rules for NOL carrybacks are changing in 2025:

• Shortened carryback period: The IRS reduces the number of years losses can be carried back to offset prior profits.

• Carryforward options remain: Businesses can still carry losses forward to future years but with adjusted limits.

• Impact on cash flow: Reduced carrybacks may delay tax refunds, affecting restaurant cash flow management.

  
  

For example, a restaurant that suffered losses in 2023 might not be able to apply those losses to tax returns from several years ago as before. This requires careful tax planning to manage cash flow and tax liabilities.

5. Increased Focus on State and Local Tax Compliance

State and local tax (SALT) rules are becoming more complex, with many jurisdictions updating their tax codes for restaurants.

• Sales tax changes: Some states are expanding taxable items, including certain food and beverage categories.

• Local tax variations: Cities and counties may impose new taxes or fees on restaurants, such as meal taxes or licensing fees.

• Reporting and payment deadlines: Restaurants must stay current with varying deadlines to avoid penalties.

  
  

A restaurant chain operating in multiple states must track each location’s tax rules carefully. For instance, a city introducing a new meal tax requires immediate adjustment in point-of-sale systems and accounting practices.

These five changes highlight the growing complexity of tax compliance for restaurants in 2025. Staying informed and proactive can save money and prevent costly errors.

Restaurant owners should consult with tax professionals who specialize in the hospitality industry to navigate these updates effectively. Early preparation, accurate record-keeping, and understanding new rules will help restaurants maintain financial health and focus on delivering great dining experiences.