Aspiring franchise owners often ask whether initial franchise fees are tax deductible. Unfortunately, the answer to this question is no, but other fees associated with franchise ownership can be tax deductible as a franchisee, such as ongoing fees.
This article will explain in detail the different types of franchise fees and the kinds of franchise fees which can be tax deductible.
Which franchise fees are tax deductible
As a franchise owner, you are entitled to various tax deductions to help lower your tax bill. But when it comes to franchise fees, not all of them are tax deductible. In general, the franchise fees that are tax deductible are those that are considered ordinary and necessary business expenses.
Here are the franchise fees that are tax deductible:
- Royalty Fees
Royalty fees are ongoing fees paid to the franchisor for the right to use its system and support. These fees are tax deductible as business expenses.
- Advertising Fees
Advertising fees are paid to the franchisor by the franchisee for national and local advertising campaigns. These fees are also tax deductible as a business expense.
- Ongoing Training Fees
Training fees are fees paid to the franchisor for ongoing training. These fees are tax deductible as a business expense.
It is important to note that not all franchise fees are tax deductible. For example, fees paid for equipment, inventory, or leasehold improvements are not deductible as franchise fees but may be deductible as other business expenses.
Franchise fees can be tax deductible, but it depends on the type of fee and how it is classified. Generally, fees paid to purchase a franchise agreement or initial training fees are not tax deductible as they are considered capital expenses. However, ongoing fees such as royalty fees, advertising fees, and other fees related to the operation of the franchise business can be tax deductible as operating expenses. Therefore, it’s essential to consult with a tax professional to ensure you are correctly categorizing and deducting your franchise fees.