My husband started a limo business this year. Purchased a franchise for $11,000. (More info: the franchise agreement is a piece of letter-sized paper with the cost and two signatures and not much else. It gives him the right to use the Carey Limo company name and get work from their dispatchers while operating his own business under them. So it is NOT a complicated franchise with other intangibles etc.) He also pays monthly franchise fees. I am self employed as a sign language interpreter and am used to Schedules A, C and SE. I did not realize that his business requires more than that. I believe it is form 4562 (from my research thus far). I've been trying to read up on amortizing and depreciating but I am still a bit confused. Is it the case that the franchise purchase cost will be put on form 4562 and not appear on Schedule C? Were we really supposed to file that back before we started the business (franchise was purchased a few months prior to start up)? Where do I put the monthly franchise fees? Any good resources for a newbie about how to amortize (plainer than plain language)? I've read the 4562 instructions but still don't quite get it. Will we just be deducting 1/80th of the franchise cost this year? As it seems I'm to amortize over 80 months. Franchise fees are a monthly expense more than an intangible asset, so can these just be a deduction for which I need to select the Schedule C category? Any assistance is appreciated! (I did read some franchise questions on here but none seemed to pertain to the initial cost and monthly fees.) --Cheryl*
asked 05 Apr '11, 20:36
I'm not sure what you have already looked at, but IRS Pub 535 is easier to read than the form instructions. You can get it in PDF format on the IRS website at http://www.irs.gov/pub/irs-pdf/p535.pdf. Franchise fees are covered on pages 28 & 29. Monthly/annual fees are covered on page 44. IRS Pub 946 covers Depreciation and Ammortization and may also be useful to you, http://www.irs.gov/pub/irs-pdf/p946.pdf.
Now for the bad news, Franchise Fees are Section 197 Intangibles - which means they are amortized over 15 years for tax purposes - regardless of their useful life. You can deduct the monthly fees as incurred as a current expense - and you are correct, this is one of those expenses that you will create a category for on Sch C. Keep in mind, monthly/annual fees are not the same as The Form 4562 did not need to be filed at the time the cost was incurred - it is filed with the return that is part of - so in your case, it is due with your 1040. The 4562 does not need to be filed to claim the on-going amortization, once the asset has been "created", you can take the annual expense on Sch C without a 4562. Keep in mind, you would still be required to file a 4562 for any new assets you have.
On the other hand, if the fee is small enough, you may be able to expense it as start-up costs under the temporary rule for 2010 - up to $10,000 can be expensed. Beyond that, it starts getting reduced.
Hope this helps,
answered 06 Apr '11, 16:40