Operating a franchise creates a distinct tax profile compared to starting an independent business. The largest upfront cost, the initial franchise fee, is not immediately deductible. Under IRC 197, the franchise fee is classified as a Section 197 intangible asset and must be amortized (deducted) ratably over 15 years (180 months), regardless of whether the franchise agreement runs for 10, 20, or 30 years. Ongoing royalty payments to the franchisor, however, are ordinary and necessary business expenses deductible in full when paid under IRC 162. The distinction between what is capitalized and what is currently deductible significantly affects the franchisee’s cash flow and taxable income, especially in the early years of operation when startup costs are highest and revenue is ramping up.
Mid-month (start deducting from the middle of the month placed in service)
Cannot accelerate
Even if franchise agreement is terminated or expired before 15 years, the remaining basis continues amortizing over the original 15-year period (anti-churning rules)
Exception to acceleration
Complete disposition of the franchise to an unrelated party allows remaining basis as a deduction
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Cite this page
Yarik Yarosh, CPA. "Tax Considerations for Franchise Businesses: Fees, Royalties, and Amortization Rules." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-franchise-tax-considerations-fees-deductions