Running a bakery can come with heavy recurring costs, from ingredients and packaging to ovens, refrigeration, payroll, and utilities. Flour prices swing, a deck oven costs as much as a car, and your electric bill in July looks nothing like your electric bill in December. The upside is that most of what you spend to bake and sell is deductible, if you record it correctly and file it on the right line.

This guide explains what the IRS lets a bakery deduct in 2024, how cost of goods sold works when you carry inventory, and which bookkeeping habits can protect deductions. Figures are current as of the 2024 tax year; confirm any dollar limits at IRS.gov before you file.

What expenses can a bakery deduct?

Under IRC Section 162, a bakery expense must be ordinary and necessary in the baking trade or business to be deductible. Flour is ordinary and necessary for a bakery. A jet ski is not. That's the standard every deduction on your return has to pass.

Bakery spending splits into two buckets that the IRS treats very differently:

• What goes into the product: flour, sugar, boxes, the decorator's hours spent piping a wedding cake. These flow through cost of goods sold (COGS).
• What keeps the doors open: rent, power, ads, insurance, the accountant's fee. These are operating expenses.

The distinction matters because COGS is subtracted from gross receipts before other deductions on Schedule C. Operating expenses come off further down. Two lines, same return, very different math.

Which form you file depends on your entity:

• Sole proprietors and single-member LLCs file Schedule C with their Form 1040.
• Multi-member LLCs and partnerships file Form 1065.
• C corporations file Form 1120; S corporations file Form 1120-S.

Everything below applies regardless of entity; only the form changes.

Can a bakery deduct ingredient and packaging costs?

Yes. Ingredients and packaging are the core of cost of goods sold for any bakery that carries inventory.

Deductible through COGS:

• Raw ingredients: flour, sugar, butter, eggs, chocolate, yeast, fruit, dairy, extracts
• Packaging: boxes, cake boards, liners, bags, ribbon, labels, to-go containers, deli paper
• Direct labor: hours your bakers and decorators spend producing product (not counter or admin hours)

The IRS formula for COGS on Schedule C Part III is straightforward: beginning inventory + purchases − ending inventory = COGS.

Count what was on the shelf January 1, add ingredient and packaging purchases recorded for the year, then subtract what is still on the shelf December 31. The difference is what you actually used, and that's what you deduct.

Spoilage matters too. If 40 pounds of butter went rancid or a tray of croissants burned, they're not sitting in ending inventory anymore, which increases your COGS deduction. Keep a simple waste log; auditors like documentation better than a round number pulled from memory.

Cost of goods sold is deducted separately from operating expenses on Schedule C and directly reduces gross bakery revenue.

For most bakeries, this is the single largest deduction on the return, bigger than rent, bigger than payroll.

Can bakeries use Section 179 for ovens and mixers?

Yes. Section 179 can let equipment-heavy bakeries deduct qualifying equipment in the year it is placed in service, subject to IRS limits, instead of depreciating it over five to seven years. For 2024, the maximum Section 179 deduction is $1,160,000, with a phase-out that begins when total qualifying property placed in service exceeds $2,890,000.

Qualifying bakery equipment includes:

• Deck, convection, and rack ovens
• Spiral and planetary mixers, sheeters, dividers, moulders
• Proofers and retarders
• Walk-in coolers, freezers, blast chillers
• Display cases and refrigerated cases
• POS hardware, scales, and tablets

Bonus depreciation is the second lever, and it's shrinking. Under current law, bonus depreciation under IRC 168(k) is 60% in 2024, 40% in 2025, and 20% in 2026, phasing to 0% in 2027 unless Congress extends it.

If you're planning a $60,000 deck oven purchase, the year you place it in service changes your first-year deduction meaningfully.

Smallwares such as sheet pans, piping tips, cake rings, bench scrapers, and French rolling pins usually do not need to be depreciated. Under the IRS de minimis safe harbor election, most bakery smallwares can be expensed as regular supplies rather than capitalized; check current IRS thresholds with your tax pro before applying it.

One catch: equipment must be placed in service before December 31 to deduct it that year. Paying for equipment is not enough. A mixer sitting in its crate in the alley on New Year's Eve doesn't count.

Can a bakery deduct rent, utilities, and commissary kitchen fees?

Storefront rent, commercial kitchen rent, and shared-kitchen fees are fully deductible in the year paid.

• Rent on your bakery, storefront, or dedicated production space
• Utilities: gas for ovens, electricity for mixers and refrigeration, water, sewer, and trash
• Commissary or shared-kitchen fees: hourly or membership fees for pop-up bakers, mobile operators, and wholesale-only bakeries
• Property insurance and common-area maintenance charges tied to the lease
• Security systems, pest control, and cleaning services for the production space

Utility bills for bakeries run higher than most retail because ovens burn gas for hours and walk-in coolers run 24/7. Track them in their own category. If you ever apply for a loan or grant, they'll be asked about separately from rent.

Can home bakers and cottage food operators deduct kitchen use?

Yes, with real limits.

The home office deduction applies when part of your home is used regularly and exclusively for the bakery. A dedicated corner of your kitchen used only for wedding-cake production could qualify. A kitchen where you also cook family dinner does not meet the exclusive-use test, and the IRS is strict on this.

Two methods:

• Simplified method: $5 per square foot, up to 300 square feet, capped at $1,500 per year.

• Actual expense method: Deduct the business-use percentage of mortgage interest, rent, utilities, insurance, and depreciation. More paperwork, often a larger deduction.

Cottage food operators, read this carefully: a state cottage food exemption is a licensing exemption. It is not an IRS exemption. You still owe federal income tax on cottage food sales, still file Schedule C, and still track ingredient and packaging costs through COGS. State cottage food laws may let you sell certain foods without a commercial kitchen, depending on your state's rules; federal law still expects you to report taxable income.

Can a bakery deduct payroll, contractors, and owner pay?

Wages paid to counter staff, bakers, decorators, and delivery drivers are deductible, plus the employer share of FICA (7.65% for Social Security and Medicare combined) and FUTA (federal unemployment tax).

Also deductible:

• Health insurance premiums paid on behalf of employees
• Retirement plan contributions (SEP-IRA, SIMPLE IRA, Solo 401(k))
• Workers' compensation premiums
• Payroll processing fees

Contractors such as a freelance cake decorator, a delivery driver you don't put on payroll, or a bookkeeper are deductible too. If you paid a nonemployee service provider $600 or more in nonemployee compensation during the calendar year, you generally must file Form 1099-NEC by January 31 of the following year.

Check the current IRS Form 1099-NEC instructions before filing, and collect a W-9 from every contractor before you pay them, not in a scramble the following January.

Owner pay works differently depending on your entity:

• Sole prop / single-member LLC: owner draws are not a deductible expense. You're taxed on net profit whether you take the cash out or leave it in the account.
• S-corp: you must pay yourself reasonable compensation via payroll before taking distributions. The IRS challenges S-corp owners who take $0 salary and $80,000 in distributions.
• C-corp: owner salary is a deductible business expense.

Can a bakery deduct vehicle, delivery, and travel expenses?

If you deliver wedding cakes, drive to farmers markets, or haul wholesale orders to restaurants, vehicle costs are deductible. Two methods, pick one per vehicle:

• Standard mileage rate: the IRS 2024 business standard mileage rate is 67 cents per mile.

• Actual expenses: deduct the business-use percentage of gas, insurance, repairs, lease payments, and depreciation.

Log every business mile: date, destination, business purpose, starting and ending odometer. Apps like MileIQ and Everlance do this automatically; a notebook in the glovebox works if you're disciplined. Without a log, the IRS can disallow the whole deduction.

Deductible bakery trips include:

• Wedding cake and catering deliveries
• Farmers market and pop-up setup runs
• Trips to wholesale suppliers and restaurant supply stores
• Travel to trade shows like the International Baking Industry Exposition (IBIE) and continuing education classes, including lodging and 50% of meals

Can a bakery deduct marketing, POS, software, and professional services?

All of these are deductible operating expenses in the year paid:

• Website: hosting, domain, and design fees
• Advertising: Instagram, Meta, Google Ads, boosted posts, printed menus, storefront signage, sponsored farmers-market booths
• POS subscriptions: Square, Toast, Clover monthly fees and processing fees
• Software: accounting (QuickBooks, Xero), scheduling, online ordering platforms, design tools, email marketing
• Professional services: CPA fees, bookkeeping, attorney fees, and business coach fees
• Business insurance premiums: general liability, product liability, commercial property

When Square, Stripe, or Toast payouts land in a Novo checking account, the deposits sync into your records. That can reduce manual reconciliation and make it easier to match deposits to POS reports.

Can a bakery deduct licenses, permits, and food-safety costs?

• Local health department permits and inspections
• Food handler certifications: ServSafe Manager, ServSafe Food Handler, state equivalents
• Business license, sales tax permit, cottage food registration where required
• General liability and product liability insurance premiums
• FDA food facility registration for wholesale bakers shipping across state lines

Wholesale and interstate bakeries: facilities that manufacture, process, pack, or hold food for consumption in the US must register with the FDA as a food facility, and re-register every even-numbered year.

The registration itself is free, but any related compliance work such as labeling review, allergen training, or HACCP consulting is deductible.

How can bakery owners track expenses and protect deductions?

One common mistake is mixing personal and business spending on one card. When your Costco run has both diapers and 50-pound flour bags, and everything hits the same debit card, you'll spend hours untangling it in April, and you'll miss deductions. Open a dedicated business checking account before your next tax year starts.

Novo business checking has a $0 monthly fee and no minimum balance requirement, which can help bakery owners separate business spending from personal spending. Additional features that fit a bakery workflow:

• Free incoming wires
• Integrations with QuickBooks, Stripe, Shopify, and Square, so transactions categorize as they land
• Novo Reserves to set aside sales tax and estimated quarterly tax payments the day the money hits, not the day the bill is due

Honest tradeoff: Novo does not accept cash deposits. If your bakery runs cash-heavy through a farmers market booth, walk-up storefront, or tip jar, plan to convert cash to a money order before depositing or keep a secondary account that accepts cash.

A copy-ready COGS worksheet you can paste into an LLM:

BAKERY COGS WORKSHEET — TAX YEAR ____

1. Beginning inventory (January 1):
   - Ingredients on hand: $______
   - Packaging on hand:   $______
   - Work in process:     $______
   Total beginning:       $______

2. Purchases during year:
   - Ingredients:         $______
   - Packaging:           $______
   - Direct labor (bakers/decorators, production hours only): $______
   Total purchases:       $______

3. Ending inventory (December 31):
   - Ingredients on hand: $______
   - Packaging on hand:   $______
   - Work in process:     $______
   Total ending:          $______

4. COGS = (1) + (2) − (3) = $______

Report on Schedule C, Part III, lines 35–42.

Paste that block into ChatGPT or Claude with a prompt like: "Turn this bakery COGS worksheet into a working Google Sheet with formulas for each subtotal and the final COGS calculation. Add a second tab for a monthly ingredient-purchase log." Review the output, then add it to Google Drive and share it with your bookkeeper.

Keep records for at least three years from the date you filed the return. The IRS generally has three years to audit, longer if there's substantial underreporting. Digital receipts stored in a shared folder count. Shoeboxes technically count too, but nobody wants to open one in year three.

Frequently asked questions

Is a home bakery taxed differently than a storefront? No. Both file the same way (Schedule C for sole props). The differences are which deductions apply: home bakers use the home office deduction; storefronts deduct rent and utilities directly.

Can I deduct the wedding cake I baked for my sister? No. Personal gifts and family baking aren't deductible. If you bake a cake as a marketing sample for a paying client, the ingredient cost flows through COGS.

Do I need to track inventory if I bake to order? Even bake-to-order bakeries should ask a tax professional how to handle ingredients and packaging at year-end, especially if any supplies remain on hand.

Are ServSafe classes and pastry school tuition deductible? Continuing education that maintains or improves skills in your current trade is deductible. Initial training to enter a new trade generally is not.

Can I write off the espresso machine for the bakery café? Yes, if it's used in the business. Section 179 or bonus depreciation applies depending on cost and timing.