It’s no secret that taxes can be a grind.
I have worked with business owners and entrepreneurs for many years, particularly in my current role as a franchise consultant, and noticed common questions around taxes when those prospects consider stepping into a new venture.
Fortunately, the news isn’t all grim. Of course, franchise owners still pay taxes like anybody else, but there are quite a few deductions and credits to be aware of. It can be helpful to hire a professional to do your taxes, specifically someone who has worked with franchises before. Regardless of who performs your tax duties, here are some key items new business owners and franchisees need to keep in mind when tax season rolls around each year.
Understand the “Franchise Tax”
If you have ever heard the term “franchise tax,” you might assume it’s simply a tax imposed on franchise owners. That’s not necessarily the case. This term mostly refers to a tax that some states or localities require businesses to pay when they incorporate or register as a business — which often occurs in situations such as new franchisees forming an LLC.
Franchise Fees Are Deductible
Franchise fees are a necessary part of the equation when making your financial decisions on whether or not to purchase a new unit. Before signing onto a franchise deal, it’s important to understand the fee structure of the system you are joining.
While they may end up causing you a headache on occasion, the good news is that fees you pay to the franchisor are tax-deductible. However, it’s important to understand the specifics.
Monthly franchise fees are handled differently than the upfront buy-in cost, which can be tens of thousands of dollars. The IRS views that as an asset and not an expense. This is why the tax code classifies that initial franchise fee as “Section 197 intangibles.” You’ll be repaying that franchise fee over the next 15 years. So if you pay Burger King a franchise fee of $50,000, for instance, you’ll be deducting that expense — but treating it as an asset that you’ll be writing off for the next decade and a half.
Some of those other significant start-up costs – like franchise training, for instance — would also be treated as assets in the same 15-year plan.
As for continuing franchise fees or royalties, which are often paid monthly or at least at times throughout the year, the IRS recognizes those as expenses, which can be written off each year.
There Are Other Tax Deductions Beneficial to Franchisees
The reason for contacting an accountant or tax professional is to find every opportunity available. It is worth it, especially to protect such a large investment of your time and money.
An experienced accountant could help you find deductions for things such as major equipment purchases or remodeling your brick-and-mortar location. For instance, if you have multiple brick-and-mortar units, your tax advisor could do a cost segregation study, which considers things like construction costs that depreciate quickly, lowering your taxable income.
Buying a franchise, or starting any business, is one of the largest financial decisions you’ll ever make. There are so many factors that go into the research process to determine what you can afford and what you should expect — both in the short term and in the years to come.
Tax implications are a major part of that determination. It requires serious consideration and may be one area where seeking help is the best option. Don’t take my word for it! It would be wise to consider the financial impacts of buying a franchise, and to even seek the help of expert tax professionals, before undertaking your next venture.
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