topic Re: Franchise Purchase in Self employed

Franchise Purchase

le007 — Sun, 14 Jun 2020 17:29:00 GMT

I purchased a Franchise from an individual and paying it out monthly. How do I report that in Turbo Tax

Home and Business??

Re: Franchise Purchase

LudwigVan_fan — Mon, 15 Jun 2020 15:56:24 GMT

Did this purchase of a franchise be comprised of only the franchise right? Or, did it include other parts of the business; e.g., furniture, equipment, building, customer lists, etc.? Basically, did you purchase an ongoing business?

If you bought a business that includes various aspects of a complete business, you and the seller must allocate the sales/purchase price to the various assets. The assets are then capitalized and either depreciation or amortization taken on the assets; depending on what category they are in. Franchise cost are Section 197 intangibles, and are amortized over 15 years.

Payments for the purchase of the franchise fee/business are not deductible in and of themselves, as the cost of the business assets/franchise is recovered through depreciation/amortization. However, it sound like you have an installment purchase, then each payment would have an interest component. The interest paid in each payment would be treated as business interest and follow the rules for interest expenses.

Here is a link to IRS Publication 535. There are many links and suggestions for other publications that are very helpful for a small business.

https://www.irs.gov/publications/p535

https://www.irs.gov/forms-pubs/about-form-8594

Re: Franchise Purchase

le007 — Mon, 15 Jun 2020 20:20:33 GMT

I paid total of $65000 for the franchise, I paid $20,000 down and now paying out the other $45,000. There were no assets. just a franchise for promoting trade shows.

The $20,000 I entered 2018 and was set up as a depreciation for 25 years. Do I set up the other $45,000 now the same.It stated that I can't change what i set up in 2018.

Also, I pay $600 monthly and $4000 annually to the franchise corporation. how do I handle these payments?

Thanks

Re: Franchise Purchase

LudwigVan_fan — Tue, 16 Jun 2020 15:13:11 GMT

You should have set up the full $65,000 in 2018. Since it is franchise, under Section 197 it could be amortized for 15 years. I would recommend amending 2018 and putting in the $65,000. It is not only the cash down, but liability amounts as well. As I stated before, franchise fee (acquisition) is a Section 197 Intangible. I don't know why for tax purposes you used 25 years instead of the 15 under Section 197. Section 197(b) provides that no other depreciation or amortization deduction shall be allowable with respect to any amortizable section 197 intangible other than provided in Section 197(a).

I don't know what the $600 and $4,000 amounts are for. Whatever amounts are paid to extinguish the $45,000 debt are not deductible...but the interest portion of those payments would be deductible. All payments made over time have an interest component, whether stated or not. If not stated, then the rules for determining unstated interest apply.

If amounts are being paid for recurring franchise fees, those are currently deductible. There is a difference between the amount paid for acquiring of a franchise and the monthly recurring franchise fees. Usually the monthly recurring fees are considered like a monthly fee that helps pay for advertising, service, etc., etc., that the franchisor provides as part of the franchise agreement. Different than the amount paid to acquire the right to have the franchise.

Please review the Pub 535 information I provided.

This thread may also help you out

https://ttlc.intuit.com/community/taxes/discussion/what-franchise-expenses-are-deductible-1st-year/00/291204

Good luck