Handling Franchise Fees on a Tax Return

Scenario: client is a sole proprietor. They enter into a small ($5,000), 5-year franchise agreement. The client is paying the $5,000 ID-10028287over a 24-month period. The client is also paying ongoing royalties and marketing fees to the franchisor. How is all of this handled on the Schedule C?


This scenario sounds complicated but the answer is straightforward.

  1. The $5,000 franchise fee is considered an asset. The $5,000 is deducted over 180 months (15 years). This is true even though the franchise agreement is only 5 years long.
  2. The monthly payments on the $5,000 are not deductible unless the client is paying interest, in which case the interest would be deductible.
  3. The ongoing royalties and marketing fees are deductible as paid.

What this means is, if the client renews the franchise agreement 5 years from now, they’ll have TWO franchise agreements to account for as an asset on their tax return — the one they entered into 5 years earlier, plus the one they just entered into.

This is true even though the old franchise agreement expired after 5 years — it’s still deducted over a 15-year period.

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