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?
Answer:
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.
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