Thank you in advance for your answers. Here is my question:

If a franchise is bought in 2010 for 10 years (service industry business) with the obligation to open 10 outlets during this period, the franchise fees are paid upfront.

The amortization of the franchise fee is over the whole period (10 year).

The first two years only one outlet will be opened, in the P&L statement of the first outlet am I supposed to account for the whole franchise fees amortization (franchise fee/10) or I should only take the part relative to the outlet (franchise fee/10/10) and the balance will be accounted for when the other outlets will be opened?

asked 08 Jul '10, 17:25

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Catherine
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edited 08 Jul '10, 18:32

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Tom
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If the franchise fee is part of the start-up costs for a new business, you can deduct $5,000 of the total start-up costs currently and the remaining costs over a 15 year period (not 10 years). The $5,000 current deduction allowed will be reduced if the total start-up costs exceeds $50,000.

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answered 08 Jul '10, 18:31

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Tom
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Great answer tom!

(08 Jul '10, 22:48) SandySea

I do not believe that franchise fees are part of the start-up costs of a new business under the IRS definition of start-up costs. Franchise fees are amortizable - which means that the expense should be taken in the correct tax year or risk losing the deduction for that year. As to how to account for the franchise fee expense with only one outlet open, it is an expense of the organization as a whole and not just one outlet. Almost like rent expense for corporate headquarters, etc.

Bob Darden, CPA in Norcross, GA

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answered 14 Jul '10, 14:46

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Bob Darden
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Bob; they are still amortizable so you can have another line item for franchise fees instead of start up costs. I still think Tom is correct in that it is a portion of start up costs and can be amortized accordingly :)

(14 Jul '10, 23:13) SandySea

IRC 195(c)(1) defines start-up costs, and I don't see anything that would exclude franchise fees.

(15 Jul '10, 14:51) Tom

IRC 195(c)(1)(B) appears to exclude franchise fees paid up front from start-up costs. It states: "which, if paid or incurred in connection with the operation of an existing active trade or business (in the same field as the trade or business referred to in subparagraph (A)), would be allowable as a deduction for the taxable year in which paid or incurred." An existing trade or business would amortize the franchise fees (if paid up front) over 15 years. They would not be deductible in the taxable year in which paid or incurred.

(29 Aug '10, 03:25) Rick 1
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Asked: 08 Jul '10, 17:25

Seen: 8,114 times

Last updated: 14 Jul '10, 14:46