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Taxes 101 For Fast Food Franchise Owners

Taxes 101 For Fast Food Franchise Owners

Owning a fast food franchise can be a lucrative venture but it is certainly not without its challenges. Taxes, for example, can be complex for restaurant franchisees. This guide is designed to help you understand the basics of fast-food franchise finances by breaking down various aspects of ownership.

Remember, however, that all franchise systems are set up differently, so owning a Chik-Fil-A, for instance, is not necessarily the same as owning a Burger King. If you have questions about issues pertaining to your specific restaurant brand, consult with a company representative or your tax planning professional. It is important to surround yourself with support from knowledgable experts, especially if you are a first-time franchisee.

Franchise Fees and Royalties

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Fast food franchise owners should have been briefed on the concept franchise fees and royalties during their training. These two financial issues are generally central to the franchise model. In most cases, they will also have tax implications. While franchise fees are typically considered startup costs and amortized over time, royalties are usually treated as business expenses by both state and federal tax authorities. Understanding the tax treatment of these payments is essential for accurate financial reporting and tax strategy.

Let's consider the example of a McDonald's franchise owner. When that individual pay the initial franchise fee to McDonald's, it is classified as a startup cost. For businesses started after September 2008, the IRS allows businesses to deduct a limited amount of organizational costs, including startup expenses. A business owner can "recover the costs they cannot deduct currently over a 180-month period.".

This recovery period begins the month the business starts "active trade".

Royalties, on the other hand, are often classified as business expenses, which have different rules in regard to tax deductions.

Employee Taxation and Payroll

The fast food industry has a large workforce with a great deal of turnover. Additionally, different payroll tax withholding regulations may apply to full-time and part-time employees. To remain compliant with both state and federal tax laws, make sure that you are adhering to the right rules for withholding income taxes, Social Security, and Medicare.

Additionally, talk to your business tax professional about reporting differences for IRS Form W-2 and IRS Form 1099, which are used to denote an employee and an independent contractor, respectively.

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Depreciation and Equipment Costs

In most cases, fast food establishment franchisees have to invest in costly equipment -- such as industrial kitchen appliances -- and furnishings. The tax treatment of these expenses is subject to depreciation rules, which allow business owners to deduct eligible portions of their purchases over time.

There are regular tax code updates related to bonus depreciation and Section 179 deductions, so stay up-to-date about changes. Both of these categories can provide substantial tax benefits for asset-intensive businesses like fast food franchises. Again, as with all topics related to taxation, schedule an appointment with a trusted tax and accounting advisor before you file any paperwork.

Entertainment and Event Expenses

Fast food franchise owners often engage in promotional activities and customer engagement events to drive sales. The deductibility of such expenses is subject to specific criteria set forth by both the IRS and state tax agencies.

At the federal level, expenses that are directly related to business purposes, such as promotional events or meetings, are typically deductible. However, these types of expenses can be subject to careful scrutiny, so make sure you properly document all transactions. This can help you avoid -- or more easily deal with -- an audit.

If, for instance, you run a Moe's Mexican Grill in a college town, you might host back-to-school events when students return to campus each year. In some cases, the costs associated with this party may be tax deductible. As always, talk to your tax professional before making any decisions.

Credit: Barry Winiker/Getty Images

Sales Tax and Nexus Tax

Navigating sales tax regulations can be challenging for fast food franchise owners, especially when operating in multiple tax jurisdictions. If, for example, a Papa John's franchise is located near the New Jersey/New York border and serves residents of both states, sales tax and nexus tax issues may arise.

The concept of nexus — the connection between a business and a taxing jurisdiction — determines a company's sales tax obligations. As described in the scenario above, it is not uncommon for fast-food franchises to operate across state lines. To avoid potential tax penalties, talk to your tax professional about your exact tax obligations annually and quarterly.

As we've previously noted, the tax aspects of operating a business in the fast-food industry can be complex. Due to this, enlisting the expertise of a tax expert is wise. Tax advisors who understand how the franchise model works can help you through even the most complicated financial matters. 

Feature Image Credit: Aleksandr Zubkov/Getty Images

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Frank Jenkins Jr

Frank Jenkins Jr

Frank Jenkins Jr. is the managing partner of Adams, Jenkins & Cheatham, a CPA practice based in Midlothian, VA. Frank specializes in Consulting services, tax planning, accounting, audit & assurances. "I genuinely care about our clients because I have a personal connection with them. This job requires me to multi-task and work under tight deadlines. I get great professional satisfaction from balancing firm and client commitments while building a strong team here at AJC."

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