First of all, this board is the greatest thing since sliced bread, and sorely needed! I hope I can help out some posters in the future. Here is my question:

I purchased a service industry franchise in 2005, and have been amortizing the initial franchise fee over 15 years (which I believe is correct). The franchise can be renewed every 5 years at my option if my account is in good standing with the franchisor. 2 years ago, I ceased doing business for the franchise and "de-activated" my franchise. I do not intend to renew the franchise agreement when the 5 year period expires in 2010, and in fact have moved on to a totally different business (same S-Corp).

Does this mean that I may amortize the balance of the franchise fee in 2010, or must I continue to amortize for the next 10 years? Could I amortize the balance this year if I am inactive (meaning I cannot use the franchise services or trademarks)and do not intend to renew the franchise agreement next year?

asked 13 Nov '09, 15:48

Steve's gravatar image

accept rate: 0%

Hmmmm if you deactivated, then I don't believe the deduction would be legit. You then would lose the ability to take a deduction for a non necessary item.

I don't think a deduction would be available for a non business expense and if you decided it was not an on-going item, then I would assume that no deduction is allowed.

BTW I like to slice my own bread but sharp items and me do not mix well :)


answered 13 Nov '09, 16:02

SandySea's gravatar image

accept rate: 7%

Not sure I get this. I am sitting with $30K of franchise fees to be amortized on the balance sheet. Are you saying I just need to write off the whole asset and not take the deduction for amortization on my tax return (i.e. a non-deductible expense in the current year)?

(13 Nov '09, 18:37) Steve

If your S-corp that had the fees amortized then ceases to do business, then you must close out the balance sheet and all flows through to your K-1. The asset then is offset by the liability and the difference flows to the equity section if I am understanding you correctly; would yes, be non deductible imho as the business is non viable

(13 Nov '09, 18:58) SandySea

A franchise fee is an intangible asset. You have the option of selling the asset or disposing of the asset. You take your gain or loss in the year you dispose of it or when no future benefit is expected from it.


answered 14 Nov '09, 17:25

Coop's gravatar image

accept rate: 0%

exactly my future benefit, disposed of

(14 Nov '09, 18:30) SandySea

Sandy, I did not read your answer as saying the same thing. The bottom line is, in the year of the final return the asset would be written and all amounts left to be amoritized would be a loss on the return. You don't "lose" it, you use it on the final return.

(15 Nov '09, 14:17) AJ

You are correct AJ; that is not what I said. Funny how being sick for over a month makes your mind muddy. I knew what I meant, but did not say it correctly. Thank you for clearing it up :)

(15 Nov '09, 16:23) SandySea

Typically, in the year the "business activity" ceases, all assets are disposed of through sale or abandonment. It appears that when the activity ceased two years ago is the year that the net book value of the franchise fee maybe should have been written-off as an abandonment loss under Section 165.

However, it depends on what facts, circumstances, & intent existed at that time with regards to ceasing business, disposition, and abandonment.

If it was reasonably & realistically possible that the the business activiy would begin again in a subsequent year, then the abandonment loss could most likely not be proper until a subsequent year when facts & circumstances provided for the filing position.


answered 14 Nov '09, 18:45

Brent%20Berkman's gravatar image

Brent Berkman
accept rate: 13%

Steve, BTW, thank you for the nice compliment with regards to TQ.

(14 Nov '09, 19:20) Brent Berkman

The S-Corp still exists, but ceased activity with this franchisor and is in a different line of business now. Does this make a difference or might I still write off the balance of the frnchise fee as an abandonment loss (depending upon the circumstances of course)?

(15 Nov '09, 20:05) Steve

If the S corp can be utilzed for another business activity and is clearly separable from the service industry activity that was ceased, the abandonment occurs when the facts & circumstances clearly establish that the activity is over and all assets disposed of and/or sold.

(15 Nov '09, 21:30) Brent Berkman

A better option would be selling the franchise. Either (a) you would get at least as much money for it as the amount that you have not already deducted, so the money from the sell would exceed the tax implications to your plan, (b) you would get less money than the undeducted amount, but you would get some money and you would be able to claim a loss on the sale.


answered 15 Nov '09, 20:57

stephenweinstein's gravatar image

accept rate: 1%

Provided and assuming, of course, that the franchise fee is a saleable asset in the open market!

(15 Nov '09, 21:21) Brent Berkman

Additionlly, the question appeared to be asking how to handle the remaining net book value of the franchise fee. Since the franchise was in the service industry and had been halted, presumably he may have tried to sell it, but couldn't.

(15 Nov '09, 21:25) Brent Berkman

The rest of the amortization should have been taken in the year you "abandoned" the business. I am not sure what you mean by saying that you "de-activated" your franchise. I always suggest that clients write a letter, stating that they are abandoning an interest. Cheryl Noland, EA


answered 18 Nov '09, 13:43

Cheryl%20Noland%20EA's gravatar image

Cheryl Nolan...
accept rate: 0%

In return for a cessation of the requirement for me to pay ongoing royalties for the balance of the 5 year period, I agreed to cease doing business under the franchisor's brand, reassign my existing accounts to other franchisees and not utilize the services provided by the franchisor. This is considered by them to be an "inactive" status until the 5 year renewal anniversary arrives, at which time I can elect to renew or not.

(20 Nov '09, 18:50) Steve

Not sure if I should start a new question or tag onto this because of the similarity. I also have a Franchise with a stated term of 5 years that is currently being amortized over 15 years as required for a section 197 intanagable. Original fee was $15000. It is being renewed this year for $5000. My plan would be to dipsoe of and take a loss on the balance of the original Franchise and create a new asset for the new Franchise (Renewal- it is a new contract with new terms and a new 5 year period) and start a fresh amortization for a new 15 year period. Because the IRS does not allow amortization of a Franchise (or any other 197 Intangable) over the same period as the stated life in the Franchise document causes a lot of problems.


answered 16 Feb '10, 21:57

Brian%202's gravatar image

Brian 2
accept rate: 0%

Brian, if you find that your question isn't answered in this thread please don't hesitate to ask your specific question by clicking the "Ask Question" button in the upper right of the screen. :-)

(16 Feb '10, 23:03) TaxQueries ♦♦
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Asked: 13 Nov '09, 15:48

Seen: 12,078 times

Last updated: 16 Feb '10, 21:57