The owners of successful franchise businesses have a lot on their plates, and varying demands depending on the type of franchise. One interest they share, though, is keeping a lid on their tax liability. If you are a franchisee, following the tips below can help you minimize your tax bill.

1. Understand Your Franchise-Specific Deductions
   Unlike other business expenses that are immediately deductible, your franchise fees, franchise training expenses and similar startup costs are considered intangible assets that must be amortized and deducted over 15 years. You may, however, be able to deduct up to $5,000 in the first year of business for qualified startup costs, subject to limitation when the costs exceed $50,000. The portion that is not deductible in the first year also is amortized over 15 years.

   What about the continuing fees you are required to pay the franchisor? These are deductible in the current tax year if you pay them on a regular schedule at least annually, and each payment is substantially equal in amount or based on a fixed formula (for example, a percentage of sales or profits). It is critical that you properly classify all of these types of expenses to maximize your deductions for each tax year.

   Similarly, you should track your inventory donations (including their fair market value and basis) to maximize your charitable contribution deductions — especially food inventory. You can deduct up to 15% of your aggregate net income or taxable income for contributions of “apparently wholesome food” from your business for the care of the ill, the needy, or infants.

2. Take Advantage of Depreciation

   The Tax Cuts and Jobs Act of 2017 (TCJA) pumped up the potential depreciation-related deductions for businesses. For example, it expanded the categories of qualified real property for which the costs can be expensed under Sec. 179 to include qualified improvement property (QIP). QIP generally encompasses any improvement to the interior of a nonresidential real property, except expansion of the property, elevators and escalators, and changes to the internal structural framework. Other eligible Sec. 179 property includes new and used machinery, equipment, certain vehicles and off-the-shelf computer software.

   For 2025, you generally can deduct up to $1.25 million of the cost for eligible property placed in service before year-end. That limit is reduced on a dollar-for-dollar basis after your qualifying purchases exceed $3.05 million. The deduction also is limited to the amount of taxable income from your business activity. You can carry forward any excess — or use first-year bonus depreciation to deduct it.

   The TCJA initially allowed the deduction of 100% of the purchase price of eligible tangible property in the year property was placed in service. For 2025, you can deduct only 40% of the price in the first year — still significant. A taxable income limit does not apply to bonus depreciation, meaning it can create net operating losses that can be carried forward.

   Note: Although bonus depreciation is scheduled to drop to zero percent in 2027, President Trump has proposed a permanent return to the 100% deduction.

3. Claim Your Employee-Related Tax Credits

   You may qualify for a variety of tax credits that can substantially cut your tax bill. For example, if your employees receive tips, you may be eligible for the Credit for Employer Social Security and Medicare Taxes Paid on Certain Tips. The credit, which is part of the general business credit, reduces your federal income tax by an amount based on your share of employment taxes paid on a portion of reported tips.

   You also could qualify for the Work Opportunity Tax Credit (WOTC) if you hire new employees who fall into one of ten targeted groups that face barriers to employment, including veterans, ex-felons, summer youth employees and recipients of food stamps (SNAP), disability benefits (SSI) or temporary assistance to needy families (TANF). The credit generally equals up to 40% of up to $6,000 of wages per employee paid in the first year. The hiring of certain eligible veterans can qualify for as much as $9,600 per employee.

   Other employer-related credits include the Small Business Healthcare Tax Credit and the Empowerment Zone Employment Credit. Eligible small businesses can obtain a credit of up to 50% of premiums paid for the cost of employee-only healthcare coverage for each employee, for two consecutive tax years. The Empowerment Zone Employment Credit provides employers in designated zones a credit of up to 20% of the first $15,000 of annual wages paid to workers who reside in the zone. The credit also applies to payments for services performed by residents.

4. Maintain Proper Recordkeeping

   Careful and timely bookkeeping does more than just position you to stay on top of the vital signs of your franchise’s financial health. Clean financial statements also make it easier to assemble accurate tax returns, which in turn helps you avoid IRS issues and prepare for audits.

   And, if you sell your franchise, clean financial statements facilitate smooth due diligence for the prospective buyer. They might help you negotiate a higher sale price, too.

5. Keep Track of Your Multi-State Tax Obligations

   If your franchise operates in multiple states, you may be liable for different state and local taxes in different jurisdictions, and multi-state taxation is complicated. Among other things, different states may apply different apportionment formulas to calculate a multi-state business’s income for taxation, as well as different rules for determining whether a business has “nexus,” or a taxable presence, in a state.

   Mistakes can prove costly. Work with a tax professional to ensure compliance with the varying state sales tax, income tax and franchise tax rules.

For more information, please contact Darin Fullmer at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Restaurant Group. Sign up here to receive our blogs, newsletters and Client Alerts.