Starting your own business can be an exciting and worthwhile pursuit, but there are some hidden costs that can quickly make an entrepreneur’s dreams turn into nightmares.
One of the biggest expenses most new business owners face is franchise fees, which can run into tens of thousands of dollars and put you in debt before you even open your doors for business.
While many think these fees are tax deductible, it’s not that simple. When it comes to taking deductions on your income taxes, the Internal Revenue Service has specific rules about what can and cannot be deducted, but what about franchise fees?
Franchise fees are not mentioned specifically in the IRS tax code, so you’ll have to use some common sense and business sense to determine whether they can be deducted or not.
This article discusses how to determine whether or not your franchise fees are tax deductible so you can feel more confident about this kind of expense in the future.
Tax Deductibles for Franchise Owners
As a business owner, you’re always looking for ways to save on taxes. One way you might be able to do this is by deducting franchise fees. If you’re thinking of starting a business by purchasing a franchise, you may be wondering if the franchise fees are tax deductible. But are franchise fees tax deductible?
The answer is: it depends. Franchise fees can generally be divided into two categories: initial fees and ongoing royalties. Initial fees, which are paid when you first purchase the franchise, are typically not tax deductible.
However, ongoing royalties, which are paid on an ongoing basis, may be partially tax deductible. To claim them as a deduction, they must meet certain criteria. You need to keep all of your royalty receipts to document your costs in case you need them for tax purposes.
In addition, the IRS states that these costs must represent at least 10% of your total revenue from the business, or they won’t be considered material enough to warrant being deducted as an expense.
Using Working Capital Loans to Pay Taxes
Many business owners use working capital loans to pay their taxes. This can be a good way to get the money you need to pay your taxes without having to dip into your savings or take out a home equity loan
However, it’s important to make sure you can afford the loan payments and have a plan for how you will use the money. Otherwise, you could end up in a worse financial situation than before.
You may be required to pay taxes on your earnings as a franchise owner. One way to pay taxes is to use a working capital loan. Working capital loans are short-term loans that can be used for various purposes, including paying taxes. To qualify for a working capital loan, you will need to have good credit and a strong business plan. Approval rates vary depending on the lender but typically range from 60% to 90%.
Working capital loans are usually repaid with interest over one year or less. Some franchisors offer working capital loans to their franchisees as part of their royalty agreement. If this is unavailable, talk to your local bank about how you might get a working capital loan for tax payments.
Tips Every Franchise Owner Needs to Know as Tax Season Approaches
As a franchise owner, you have a lot of responsibility regarding taxes. Not only do you have to file your taxes, but you also have to file business taxes. And, if you’re in a multi-unit franchise, you have to file taxes for each location. So, as tax season approaches, it’s important to make sure you have all your ducks in a row. Here are some tips to help you out
Don’t Forget About the Section 179 Tax Deduction
Small business owners have to be extra careful when it comes to taxes. There are a lot of deductions and credits available, but it can be hard to keep track of them all. That’s why it’s important to know about the Section 179 tax deduction.
What is Section 179, and how does it work? It’s a tax deduction that allows you to write off more than $500,000 of qualified equipment (computer software doesn’t count) purchased or financed during your tax year.
This is generally larger than other deductions available to small business owners and can be used instead of expensing equipment over time through depreciation deductions. That’s why it’s crucial to know whether your business qualifies for Section 179.
You can deduct up to $25,000 immediately in 2019 and 2020 on qualifying new or used equipment with lifespans longer than one year. The amount you can deduct decreases in 2021 until all immediate expensing ends in 2022.
Recoup Your Franchise Fee Over 15 Years
The IRS says you can do so over 15 years if you’re looking to recoup your franchise fee. That means you can deduct a portion of the fee each year on your taxes. Of course, this is assuming that your business is profitable. If it’s not, you may be unable to deduct the entire franchise fee.
For example, if you’re trying to deduct $15,000 in franchise fees, 25 percent of your initial investment, over 15 years, you can deduct $1,500 each year on your taxes. The IRS stipulates that you must depreciate expenses based on their useful life. In most cases, useful life is how long it takes for an asset to wear out and be replaced with something new. In this case, it would be 15 years.
Undergo A Cost Segregation Study
As a franchise owner, it’s important to undergo a cost segregation study to determine how much your expenses are tax deductible. A cost segregation study can also help you save money on your taxes by identifying which expenses can be classified as business expenses. Additionally, a cost segregation study can help you keep track of your expenses and ensure that you deduct all of the eligible expenses on your taxes.
An accounting firm or professional advisor typically conducts a cost segregation study. A cost segregation study aims to identify how each asset used in your business is classified for tax purposes.
These assets may be classified as ordinary or capital expenses and can change their classification based on several factors, including how they were purchased, when they were placed into service, and how they are used within your business.
Having a cost segregation study performed helps franchise owners claim additional tax deductions that would otherwise go unreported. The results of a cost segregation report are then put into IRS form 8594 for use when filing your taxes.
Hire A Tax Expert
Tax season is a busy time for everyone, and it can be especially hectic for small business owners. This is because many tax laws apply to businesses, and it can be difficult to keep up with all of the changes.
A tax expert can help you ensure that you comply with all of the latest tax laws and can help you maximize your deductions. Additionally, a tax expert can help you resolve any issues that you may have with the IRS. So, if you feel overwhelmed by taxes, hire a tax expert to help you out.
Hiring a tax expert doesn’t have to be expensive. When looking for a tax expert, consider someone with experience with small businesses and ensure they aren’t charging you by their time. If you have one, you may also want to consult your accountant or financial advisor, as they can offer advice at no cost.