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Amortizing a Franchise Fee: What You Need to Know
Discover how deducting your franchise fee over time can save you thousands in taxes. Learn why understanding amortization is crucial for franchise owners.
Building the right tech stack is key
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How to choose the right tech stack for your company?
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What to consider when choosing the right tech stack?
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What are the most relevant factors to consider?
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What tech stack do we use at Simpletech?
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When you purchase a franchise, you are required to pay a franchise fee. This fee is often a large amount of money (30-50k), and it's important to understand how you can deduct it and lower your taxable income.
Most franchise owners forget to pay the franchise fee out of their business account (because it hasn’t been set up yet!). If this is you, do not forget to remind your tax accountant that you paid this and need the deduction!!
Want the Cliff-Notes?
The franchise fee should be amortized over the term of the franchise agreement. Amortized is just a fancy word for taking the deduction over a period of time. Deducting the franchise fee over time will ensure you are paying less taxes every year over the life of your franchise agreement!
First things first...
The franchise fee is considered an intangible asset, and if you got the chance to read our article on the difference between depreciation and amortization...you would know that because the fee is intangible, it will need to be “amortized.”
To amortize the fee, you will split the up-front purchase cost over a 15 year time period, unless your franchise agreements ends in less than 15 years, then you will amortize over the term of the agreement. Most franchise agreements are 10 years.
Each year...
You will take the initial fee (ex. $100,000) and divide it over the 15-year term, which would leave you with $6,667 per year or if you are amortizing on a monthly basis it would be $555 per month.
It's important to remember that the amortized fee is required to be equally divided across the 15 years (or life of the franchise agreement).
When it's time to renew...
You will do the same thing you did initially, by taking the renewal fee and dividing it by the years that the renewal agreement covers, you will be able to determine your yearly amortization.
Tax Incentives
By amortizing the franchise fee, the IRS allows you to deduct the cost of amortization as a tax deductible expense. However, it’s important to remember that the actual payment of the franchise fee is consider a Section 197 Intangible, and is thus, not tax deductible.
Only the yearly amortization is tax deductible.
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