Tax Considerations for Gym Franchise Owners: Franchise Fees, Royalties, and IRC 197
Opening a gym franchise (Anytime Fitness, Planet Fitness, Orangetheory, F45, Snap Fitness, Crunch, Gold’s Gym) involves paying a franchise fee, ongoing royalties, and potentially a territory fee. The tax treatment of each payment is different: the initial franchise fee is a Section 197 intangible asset amortized over 15 years, while ongoing royalties are ordinary business expenses deducted in the year paid. Understanding these distinctions affects the franchise owner’s cash flow projections and tax planning.
The initial franchise fee ($15,000-$50,000+ depending on the brand) is an IRC 197 intangible asset amortized over 15 years on a straight-line basis, regardless of the franchise agreement’s term. This means a $40,000 franchise fee produces a $2,667/year amortization deduction, not a $40,000 first-year deduction. Territory fees and area development fees are also IRC 197 intangibles. Ongoing royalties (typically 3-8% of gross revenue) are deductible as ordinary business expenses in the year paid. Marketing fund contributions (typically 1-3% of gross revenue, required by the franchise agreement) are also deductible as advertising expenses. Equipment purchased for the franchise (cardio, strength, flooring) qualifies for Section 179 and bonus depreciation, with the same rules as any gym. Leasehold improvements (build-out) are qualified improvement property (QIP) with 15-year recovery and 100% bonus depreciation.
Why is the franchise fee amortized over 15 years?
Under IRC 197, a franchise agreement (including the right to use the franchisor’s trade name, business system, and proprietary methods) is a “Section 197 intangible.” All Section 197 intangibles are amortized over 15 years, regardless of the actual term of the franchise agreement.
This means:
- A 10-year franchise agreement with a $30,000 fee: amortized over 15 years ($2,000/year for 15 years)
- A 20-year franchise agreement with a $50,000 fee: amortized over 15 years ($3,333/year for 15 years)
- A perpetual franchise agreement (some brands offer this): amortized over 15 years
The 15-year rule is mandatory. The franchise owner cannot elect to expense the franchise fee under Section 179 or bonus depreciation (those provisions apply to tangible property, not Section 197 intangibles). The franchisee cannot choose a shorter amortization period, even if the franchise agreement has a shorter term.
What about ongoing royalties?
Franchise royalties (typically 3-8% of gross revenue) are deductible as ordinary business expenses. They are not amortized; they are deducted in the year paid. For a franchise generating $800,000 in revenue at a 6% royalty rate: the royalty is $48,000, deductible in full.
Marketing fund contributions (national advertising fund, local advertising requirements) are deductible as advertising expenses. These are typically 1-3% of gross revenue.
Technology fees (POS system, member management software, website) charged by the franchisor are deductible as business expenses.
What happens when the franchise is sold?
When the franchise owner sells the business, the remaining unamortized franchise fee is included in the basis of the franchise. If the franchise fee was $40,000 and $10,667 has been amortized (4 years), the remaining basis is $29,333.
The sale price is allocated among the assets: equipment, leasehold improvements, franchise agreement (intangible), goodwill, and other assets. The gain on the franchise agreement and goodwill is ordinary income to the extent of prior amortization deductions (amortization recapture) and capital gain on the remainder.
Related guides:
- Fitness Gym Employee Management Payroll
- Fitness Gym Entity Structure Scorp
- Fitness Gym Equipment Financing Section 179
- Fitness Gym Insurance Liability Deductions
- Fitness Gym Membership Revenue Recognition
The Business Assessment is a fixed $250. You get a written, CPA-reviewed analysis of the franchise fee amortization, the royalty deductions, and the equipment/build-out write-offs for your franchise.
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Yarik Yarosh, CPA. "Tax Considerations for Gym Franchise Owners: Franchise Fees, Royalties, and IRC 197." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/fitness-gym-franchise-tax-considerations
This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.