What franchise expenses are deductible 1st year?

[ik]

I bought a franchise last year. I had a lot of expenses but no income. What can I deduct without amortizing: franchise fee, LLC tax, legal, travel, meal, office furniture (cheap) and supply, car expenses.  

Also, I want to deduct a home office expense. I spent a lot of time at home researching different opportunities before deciding what franchise to purchase.  For the question asking when did I start using a home office for work can I put the date prior to when I officially signed the agreement? Do I need to have any business income to actually use this deduction? Thank you so much!

[Cindy0H · Accepted solution]

You can have no income and still file as a self-employed person on your taxes. You can deduct all of those items you have mentioned. The franchise fee will be entered as a business asset. The steps are outlined below after home office costs. There is also something called "Startup costs":

Startup costs come from investigating the creation or acquisition of an active trade or business. They are paid or incurred before the business opens its door. 

Examples include:
 - Market research 
 - Travel costs
 - Salaries
 - Consulting fees
 - Accounting and legal fees
 - Pre-opening advertising expenses, and
 - Overhead

How these expenses are handled:
Up to $5,000 of startup costs paid or incurred can be deducted if the total startup costs incurred don't exceed $50,000. An election can be made to amortize costs in excess of $5,000 over a period of 15 years.

If total startup costs exceed $50,000, the excess over $50,000 reduces the amount you may deduct. For example: If you incur $52,000 worth of startup costs, you can deduct $3,000 ($5,000 - ($52,000 - $50,000 = $2,000)) and amortize the remaining $49,000 over at least 15 years.

About the home office deduction:

The deductible home office expense is limited by the income for the business that is attributed to the home office and by the other expenses for the business.  If the home office expenses are limited and not allowed to be taken on the current year’s return, then they are carried forward to the next year as long as the actual home office expenses were being used and not the simplified method based solely on the square feet of the office. 

So you can enter it as a deduction but it will not be taken this year with no income. The date when you start using your office can be prior to signing the agreement.

The IRS requires you to amortize this initial franchise fee over 15 years, rather than all at once. The good news is that for the next 15 years, you’ll have that as a tax deduction!

This will be entered as a business asset. Here's how:

• Business Assets...start
• Describe Asset....Intangibles
• Amortizable intangibles
• Describe... franchise fee...cost $49,500...date
• None of the above
• I used 100% for business...date you started using it
• Code 197
• The amortization amount is computed as if the asset will be held for 15 years. If it is not renewed at the end of the ten years, the remaining balance can be deducted in the 10th year.

If you have other questions, please ask in the comment box below.

 [Edited 04.05.19|11:59am PST]

[ik]

Thank you for your answer! I paid $49,500 franchise fee. Where do I enter it? Thank you!

[Cindy0H]

 [Edited 04.05.19|11:59am PST]

[sfaerber]

To be clear, are you saying that you can't deduct any amount of the initial franchise fee in the first year, even if it was less than $50,000 and the deducted amount would be less than the $5,000 allowance for start-up costs?

[Critter]

Read the answer above carefully...

The IRS requires you to amortize this initial franchise fee over 15 years, rather than all at once. The good news is that for the next 15 years, you’ll have that as a tax deduction!

[Devi]

Hi,

 I have a doubt on Franchise amortization 

1) Can the monthly franchise royalty fees ( in my case it’s fixed) be amortized at the year end? If so, what is the calculation?

2) Can brand building, advertising expenses also be amortized? Is there any restriction or % possibility? Can I amortize this with a 5yr or 10 yr?