Tax Deduction Written on Memo on Desk

Navigating Franchises and Tax Deductions

5 min read • Dec 30, 2020 • Derek Miller

Tax season can be stressful for almost any business owner—especially a franchisee. Not only are you trying to complete your personal taxes, but you’ve also got the taxes you owe as a business and the subsequent tax forms for your full- and part-time employees to consider. 

However, tax season can be less stressful if you’re prepared and diligent with your recordkeeping throughout the year—you may even save money. Good organization and documentation can ensure that you get the tax deductions you deserve. Follow this guide to learn what expenses can be deducted from your franchise taxes. 

What Is a Tax Deduction?

A tax deduction lowers the amount of taxable income for your franchise, which will decrease your taxes owed to the IRS. Deductions are often related to business expenses or allowances from the IRS deemed essential to operating your business. 

For example, if you earned $100,000 in 2020, you might be able to report earning only $95,000 after you factor in $5,000 in business deductions from marketing, operating, or legal expenses. By maximizing your allowable deductions from your income, you can lower your total earnings—meaning you owe less in taxes.

What Tax Deductions Should Franchise Managers Know?

Franchise managers often operate as small business owners, which will dictate your taxes and potential deductions. There are a few key deductions that you need to know. 

  • Franchise fees: Franchise owners can deduct initial licensing fees as well as ongoing renewal costs. 
  • Franchise training expenses: If you have to pay for franchise training for you and your employees, you can deduct these expenses. These trainings could qualify as operating expenses if you need to conduct them to operate a franchise or as education expenses if you sought out franchise training to become a better manager.  
  • Travel expenses: Franchisees can deduct business-related travel expenses, which include attending an industry conference, meeting with other franchisees, and visiting store locations in different cities or states. The types of expenses you may be able to deduct include gas mileage, airline costs, hotel rates, and meals. 
  • Marketing expenses: Advertising and promotional costs are completely deductible and considered essential costs for operating and growing your business. You can deduct things like launching a website, printing business cards, and sponsoring an event. 
  • Phone and internet expenses: Like your marketing costs, your phone and internet costs are considered essential business operations. 
  • Rent expenses: If you rent essential equipment or a location for your business, you can deduct these costs from your taxes. 
  • Interest costs: If you take out a loan or line of credit, then you can deduct any interest accrued over time in your taxes. However, the IRS has guidelines for what interest can be deducted to ensure that you’re in good standing with your creditor and have a plan to pay off the full amount of the debt within an agreed-upon time frame.
  • Employee benefits: Supporting your employees can help you to save on your taxes. You’re likely able to deduct the costs of health benefits, retirement, and any other support systems that you offer to your employees. These benefits can also make your employees more loyal to your business.  
  • Home office: If you have a home office or have had to work remotely during the coronavirus pandemic, you can deduct a portion of your home expenses from your taxes. These expenses include things like a percentage of your rent or mortgage, your utility costs, and the cost of equipment like your desk and chair. 

Understanding what you can and cannot deduct on your taxes will help you to avoid an audit and ensure that you don’t miss out on potential deductions. The next section will dive deeper into how to deduct items that blur the line between business and personal home expenses.  

You Cannot Deduct Personal Expenses 

As a business owner, you can only deduct expenses related to your company—not your personal costs and social needs. However, if you use something for both personal and business uses, you can deduct a percentage of its use for your business on your taxes.

A common example of this is your car: let’s say you use your personal vehicle to deliver orders to customers and pick up materials from a vendor. A percentage of the gas, insurance, and general upkeep can be deducted as a business or operating expense. 

To make sure you calculate this percentage correctly, you could use a gas mileage tracking app throughout the year to see how much you drive professionally compared to personally. Then, take that percent and deduct your automotive costs. 

Use a Tool to Track Your Expenses

One of the best ways to reach your maximum tax deductions: keep organized records of your expenses throughout the year. By documenting each charge and sorting receipts into specific categories, you can quickly figure out what can be deducted. 

Consider using a tool like Lendio’s software, which is free for small business owners. We can help you with your bookkeeping and teach you healthy accounting habits that’ll last for years.

Did you know your company’s tax preparation could feel as good as a day at the spa? With Lendio, it does.

The information provided in this post does not, and is not intended to, constitute tax advice; instead, all information, content, and materials available in this post are for general informational purposes only. Readers of this post should contact their tax professional to obtain advice with respect to any particular tax matter.

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Derek Miller

Derek Miller is the CMO of Smack Apparel, the content guru at Great.com, the co-founder of Lofty Llama, and a marketing consultant for small businesses. He specializes in entrepreneurship, small business, and digital marketing, and his work has been featured in sites like Entrepreneur, GoDaddy, Score.org, and StartupCamp.