It’s a holiday week, so I’m re-posting popular blog posts from the past. New material resumes next Tuesday the 10th.
Scenario: client is a sole proprietor. They enter into a small ($5,000), 5-year franchise agreement. The client is paying the $5,000 over a 24-month period. The client is also paying ongoing royalties and marketing fees to the franchisor. How is all of this handled on the Schedule C?
This scenario sounds complicated but the answer is straightforward.
- The $5,000 franchise fee is considered an asset. The $5,000 is deducted over 180 months (15 years). This is true even though the franchise agreement is only 5 years long.
- The monthly payments on the $5,000 are not deductible unless the client is paying interest, in which case the interest would be deductible.
- The ongoing royalties and marketing fees are deductible as paid.
What this means is, if the client renews the franchise agreement 5 years from now, they’ll have TWO franchise agreements to account for as an asset on their tax return — the one they entered into 5 years earlier, plus the one they just entered into.
This is true even though the old franchise agreement expired after 5 years — it’s still deducted over a 15-year period.
Image courtesy of Ambro / freedigitalphotos.net
“This blog post, along with comments that may follow, should not be considered tax advice. Before you make final tax or financial decisions, please secure a professional tax advisor to give you advice about your unique situation. To secure Jason as your accountant, please click on the ‘Services’ link at the top of the page.”