Franchise Expense

[zeros]

Client purchased cleaning franchise and paid $2000.00 for it in Dec 08.. He will be filing a schedule C. Problem is he didn't really start the business until Jan 2009. Would he be allowed to deduct any of the franchise cost in 08? What is the write-off period for a franchise?

[BOB W]

I'm not sure if I researched it or not but I used 15years. I would start it in 2009.

[ChEAr$]

Client purchased cleaning franchise and paid $2000.00 for it in Dec 08.. He will be filing a schedule C. Problem is he didn't really start the business until Jan 2009. Would he be allowed to deduct any of the franchise cost in 08? What is the write-off period for a franchise?

Not clear. Did he purchase a new franchise in order that he start it up? Or did he purchase an existing franchised business.

It really depends what the 2000 is for. For example if it's for an existing business, what part of the purchase price was for equipment?

If for a new franchise, was the 2000 in actuality a franchise FEE? If so, It's amortizable.

[zeros]

Chear$

New franchise. Is this considered "set up cost? Then would first $5000 be deductible? It looks like this would be 2009 business anyway.

[ChEAr$]

New franchise. Is this considered "set up cost? Then would first $5000 be deductible? It looks like this would be 2009 business anyway.

Well heck, if he only paid $2000, how could he even dream of deducting (or amortizing)
$5000? and yes, it's a 2009 expense if he isn't in business until January.

[Nashville]

Not Start-up Costs

Don't believe depreciable equipment or amortizable costs can be included in the $5000.

This is good because it guarantees deductibility of the current amount of amortization.

This is bad because only the current years' expense is allowed.

Last time I had a franchise fee I used 60 months. But that was before the era of Form 8594 and the like. I believe franchise fee amortization has a special code section.

[S T]

Franchise Fee

Usually a Franchise Fee is -
"An up-front entry fee, usually payable upon the signing of the contract (franchise agreement) for the right to use the franchisor’s name, logo, and business system. the franchise fee can also be the consideration paid for initial training, site selection, operations manuals, and other help given by the franchisor before the opening of the business. Franchise fees can be amortized over the life of the franchise agreement. " Sometimes after that there are subsequent renewal fees - I have one client that has an annual renewal fee.

Franchise Fee is an intangible asset under Section 197 - Amortized over 15 years (180 months) I believe you can use a shorter Amortization period if the Franchise Fee has a shorter term, but I can not find the reference to it. Subsequent Annual Fees are expensed each year.

From Pub 535

Franchise, trademark, or trade name. A franchise, trademark, or trade name is a section 197 intangible. You must amortize its purchase or renewal costs, other than certain contingent payments that you can deduct currently

I believe the Amortization begins the date granted - (start up expenses ) for business begins the date opened to the public, you should check and compare - the date paid and the date of the Franchise Agreement or the Date the Franchise Agreement commences which might guide you to which year to commence Amortization.

Which I could find the exact reference for you

Sandy