Franchisees – that is, business owners who purchase an extension of an existing business model – have numerous tax issues which they need to consider. Tax issues typically rank among the most significant concerns for all business owners; accordingly, a company’s tax strategy may be the result of many hours of professional work. Depending on its size, a given company might have an entire team of people solely dedicated to developing an optimal tax strategy. As we know, tax law changes from year to year, often in a very substantial way. This means that companies often have to research new strategies and change their methods on a regular basis.
In this post, we’re going to discuss a few of the tax issues relevant to franchisees. This post won’t cover all issues relevant to franchisees, of course, but these issues are certainly among the more critical ones which businesses should be concerned about.
State & Local Taxes
Unlike franchisors, most franchisees will not have to devote too much energy to worrying about their nexus or physical presence within a given state. Franchisees are concerned with a single business which represents a “satellite” or extension of an existing business model. This means that franchisees will have physical presence in a single location, and will therefore be subject to the sales tax laws of only one state. However, depending on the nature of the business, franchisees should still be aware that they may involve themselves with other sales tax regimes if they have interstate connectivity. Sales tax law changed dramatically with the Wayfair decision of 2018, and franchisees should at least be aware of this holding and its significance.
Along with sales tax law, franchisees should also be concerned with other local taxes, such as the state level corporate tax. Certain states have a full corporate tax, while others have a less severe type of business tax, such as a B&O (“business and occupation”) tax, or a “gross receipts” tax, and so forth.
Franchisees also need to be aware of the various tax credits for which they may be eligible. Two important tax credits are the work opportunity tax credit (WOTC), and the FICA tax credit for tips. The latter tax credit applies specifically to restaurants. The WOTC reduces income for franchisees which hire workers from certain groups, such as certain ex-prisoners, qualified veterans, aid recipients, and so forth. The tax credit is based on the wages earned by these qualified workers. The FICA tax credit for tips operates as follows: restaurants may claim a credit toward their income tax when they contribute toward the FICA tax on employee tips. The tax credit is calculated based on the “creditable tips” on which the FICA taxes are paid.
Cost Segregation Studies
Another tax issue relevant to franchisees is depreciation. Depreciation refers to the process of a piece of real or personal property decreasing in value as it goes through its so-called “useful life.” Business owners are able to take tax deductions based on this depreciation, and these deductions are based on schedules which apply to specific types of property. Commercial real estate, for instance, is currently depreciated over a period of 39 years. Personal property, such as electrical wiring, heating systems, and so forth, are generally depreciated over a much shorter schedule.
When a franchisee sets up a business, that franchisee can accelerate his or her depreciation schedule for certain property by utilizing a “cost segregation study.” This type of study will essentially disaggregate all the construction and improvements made in a given situation, so that all the real property and personal property are properly classified. Subsequently, the owner can take advantage of the accelerated depreciation schedules for the personal property. Depending on the situation, this can literally result in tens of thousands of dollars in tax savings in short term.
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Trembly Law Firm
9700 South Dixie Hwy Penthouse 1100
Miami, Florida 33156