Very Very Good restaurant!!

[amonEA]

Wow! Great Restaurant! It has been on Food Network, and many national Daytime TV Shows! As a matter of fact this restaurant just won an award for one of their meals on a national TV show!

About three years ago this Restaurant started the franchising process. They had lots of expenses (legal fees, start up costs, etc) but have not sold any franchises. Well they expensed these expenses as they were going and used them against their income from their restaurant business. However now they have started a separate entity (Partnership, Form 1065) and have been using some of the monies from the main restaurant to get the Franchises up and going. Actually they just sold a Franchise in 2008, but not only did they sell it they also opened it and started collecting royalties from it.

My question is since they have finally sold one and have already expensed the startup costs of the Franchise off of their primary restaurant. Do they have to pay capital gains on the sell of the franchise? If yes than I was thinking they would not have a cost basis. And 100% would be a capital gain. If not do they treat the sells as royalties? I am thinking that they have to pay capital gains but am not sure and I want to be 100% before I file this first Form 1065.

[erchess]

My Opinion

I don't think they had "startup costs" in the technical sense since they were already operating a business when they began franchising and did not separate out the franchising operation until later.

I can't see any reason why the sale of the franchise would result in anything other than ordinary income but maybe someone who knows more than I do will step in and correct me.

[ChEAr$]

although

I don't think they had "startup costs" in the technical sense since they were already operating a business when they began franchising and did not separate out the franchising operation until later.

I can't see any reason why the sale of the franchise would result in anything other than ordinary income but maybe someone who knows more than I do will step in and correct me.

those initial franchising costs should have been amortized, what's done is done.

Monies received from a franchisee are ordinary income, unless some might be a
deposit, say on a sub lease. Be careful to read the franchising agreement carefully
to see what's what.

[S T]

Shouldn't there be

A separate Company for the Franchise not tied to the actual business? Just thinking out loud.

Sandy

[erchess]

Ummmmm Harlan

those initial franchising costs should have been amortized, what's done is done.

Monies received from a franchisee are ordinary income, unless some might be a
deposit, say on a sub lease. Be careful to read the franchising agreement carefully
to see what's what.

What is your authority for the statement that the seller of franchises has to amortize the initial costs of getting set up to sell franchises?

[ChEAr$]

probably my poor memory at the moment here at home!

What is your authority for the statement that the seller of franchises has to amortize the initial costs of getting set up to sell franchises?

But it makes sense that these are start up costs of a new line of business, don't you think?

True, the OP said the company already operated a restaurant (or more?) and then decided to franchise. Now if a brand new company (and I would have recommended such even in this case, that a new LLC be formed for the franchising endeavors) were formed, before any revenues come in, aren't all those costs start up?

[ChEAr$]

definitely

A separate Company for the Franchise not tied to the actual business? Just thinking out loud.

Sandy

should be separate entities. Since you're FROM California, you must remember Messieurs
Baskin and Robbins from whom I learned the franchising business.

Ah, those were good times, taste testing and full of fringe benefits which didn't have to be included on W2 forms! (grin