Tax Planning for Franchise Owners: Franchise Fees, Royalties, Multi-Unit Structures, and IRC 197 Amortization

Franchise ownership is one of the most common paths to business ownership in the United States, and the tax treatment of franchise costs is more favorable than many franchisees realize. The initial franchise fee, the transfer fee (if purchasing an existing unit), the ongoing royalties, the required advertising fund contributions, and the equipment and buildout costs all have specific tax treatments that, when properly structured, can produce $50,000-$200,000 in first-year tax savings for a new franchise unit. Under IRC 197, any franchise, trademark, or trade name acquired after August 10, 1993 is an amortizable Section 197 intangible, deductible ratably over 15 years (180 months). This includes the initial franchise fee, the value of the franchise rights in a resale transaction, and any goodwill acquired in the purchase of an existing franchise unit. Ongoing royalty payments and advertising contributions aren’t IRC 197 intangibles; they’re currently deductible operating expenses under IRC 162.

How should franchise owners structure their taxes?

Which franchise costs are easy to deduct the wrong way?

Start with pre-opening costs. The first-year deduction for startup costs is $5,000, but it drops dollar for dollar once total startup costs pass $50,000, and it’s gone entirely at $55,000. Past that point, every dollar of startup cost is spread over 180 months from the month the business opens, so $80,000 of pre-opening costs works out to about $444 a month.

Royalties tied to sales and paid at least annually are deducted as you pay them, while the upfront franchise fee is amortized over 15 years. Dues to a franchisee association or trade group aren’t club dues, so they’re generally deductible. Mileage between your units is business travel at 70 cents a mile for 2025, then 72.5 cents a mile from January 1 to June 30, 2026 and 76 cents from July 1, 2026.

How do multi-unit franchise owners handle taxes across locations?

Each location’s income and expenses should be tracked separately for management purposes, but all units typically flow through the same entity and tax return. If locations are in different states, you may owe state income tax in each state where you have nexus, requiring separate state returns and apportionment calculations. Sales tax obligations are location-specific: you register, collect, and remit in each jurisdiction where you operate. Multi-unit owners often benefit from cost segregation studies on each location’s build-out to accelerate depreciation deductions. Consider whether a holding company structure (parent LLC owning separate LLCs for each location) provides better liability protection and operational flexibility.

Related guides:

• Franchise Business Tax Rules: Deducting Franchise Fees, Royalties, and Startu…
• Tax Considerations for Franchise Businesses: Fees, Royalties, and Amortizatio…
• Tax Considerations for Franchise Businesses: Fees, Depreciation, and Entity S…

How are franchise fees and royalties treated for tax purposes?

Initial franchise fees paid to acquire a franchise are treated as Section 197 intangible assets and amortized over 15 years, regardless of the actual franchise agreement term. Ongoing royalty payments based on a percentage of gross sales are deductible as ordinary business expenses in the year paid, reported on Schedule C or the applicable business return. Advertising fund contributions required by the franchisor are also deductible as ordinary business expenses, separate from the royalty calculation. If you sell or terminate your franchise, any remaining unamortized franchise fee balance is deductible in the year of disposition, and the gain or loss on the sale is generally treated as ordinary income under IRC 1253 unless the franchise agreement gives the franchisee significant rights that qualify for capital gains treatment.

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.