TAXES & LICENSES, COMMISSIONS & FEES

Franchise, Trademark, and Tradename

If you pay franchise, trademark, or trade names fees, these costs generally are considered deductible business expenses. Entrepreneurs who launch entirely new businesses may incur tradename or trademark fees as they attempt to uniquely identify their business and / or their products. Entrepreneurs who purchase the right to operate an already established business may incur franchise fees. Trade name, trademark and franchise fees all are considered considered Section 197 intangible assets, which are generally deductible over a fifteen year period.

ENTREPRENEUR

Jamie is a sole proprietor who owns a small garden and lawn mowing business. Recently, Jamie decided to become a franchisee of Ace Lawn Mowing to help expand his territory. The terms of the franchise agreement outline that for five years Jamie must pay a percentage of his income to Ace (amount is substantially equal annually). Since Jamie's franchise payments could be considered contingent, he is eligible to deduct this these quarterly franchise fees in full each year on line 23 of his Schedule C.

PHOTOGRAPHER

Karen a photographer who recently moved to California. To quickly acquire a book of business, in January she entered into a 15 year franchise agreement with Hollywood Design and Photography. Karen paid a one time franchise fee of $12,500 and agreed to pay Hollywood an additional 4% of her net income each year. When Karen prepares her taxes she should amortize the $12,500 franchise fee over 15 years and deduct her contingent fee in its entirety.

DEVELOPER / ENGINEER

Jared is a sole-proprietor developer who recently launched a new mobile gaming application. To protect his brand, he registered a trade name and trademark for his app. Inclusive of design, legal and filing fees he spent $30,000. Since his trademark and trade name are considered intangible assets, Jared should to amortize the $30,000 over 15 years and deduct $2,000 ($30,000 / 15 years) each year when he prepares his taxes (note that if his trade name and trademark were placed into service in the middle of the tax year, his first year and last year deduction may be less than $2,000).

REAL ESTATE AGENT

Paolo is a self employed real estate agent who has been out on his own for five years. At the beginning of this year he paid $450 to acquire a trade name to make his business appear more professional. Pablo's accountant advised him that even though the trade name was not expensive, since it is a Section 197 intangible the IRS requires that he recognize the cost of his trade name over a fifteen year period.

DESIGNER

Anna is a graphic designer who registered a new trademark for her business in January of this year. She paid $7,500 for her trademark. Since this was a legitimate business expense she told her tax preparer that she would like to deduct the cost on her Schedule C. Her accountant advised her that rather than deduct the full $7,500 this year, she should amortize this expense over 15 years, so he completed Form 4562 (depreciation and amortization schedule) and deducted $500 ($7,500/15 years) on her current year Schedule C.

MORE INFORMATION ON RETURNS AND DISCOUNTS

  • Your trademark, trade name and franchise fees generally should be amortized over 180 months on a straight line basis, starting from the later of the month you pay for your fee, or the month you start your trade or business.
  • All costs you incur in connection with developing your trademark or trade name including but not limited to filing, legal and design fees should be included in the basis of your asset (i.e. if a trade name fee was $100 but you also paid a lawyer $350 to secure the trade name, your basis / asset cost would be $450).
  • Franchise payments you make could be fully deductible in the year incurred if your payments are contingent on productivity, use or disposition, you pay at least annually for the entire term of your agreement, and if the amount pay monthly, quarterly, or yearly is substantially equal or fixed.
  • Trademarks, trade names and franchise fees will always be considered Section 197 intangibles, regardless of whether or not you incur these costs as part of an acquisition (whereas some other types of intangible assets would only be considered Section 197 intangibles if part of an acquisition).

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