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Franchise Fees

  • Date Submitted: 02/02/2014 11:04 AM
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ALISON WRIGHT
MODULE 2 – RESEARCH PROBLEM 4
NOVEMBER 6, 2011

The franchise fee can be written off as a business expense as the corporation is being terminated as well.   To write off the legal fees, there needs to be proof that there is no recourse left in recovery.   Schedule M-1 would be used to deduct both the franchise fee and the legal fees used to try and recover the franchise fee.   Form 1120 would be used to file the corporate tax return.   My determination of this is based on the following research.  
The IRS classifies franchise fees as Intangible Assets, which is explained in the IRS Code under Section 197 the treatment of Intangible assets that have been acquired or placed in service after August 10, 1993 and that were used in Trade or Business for the production of income.

The IRS has stated that these assets normally have to be amortized over 15 years.   In general, the IRS has specifically allowed "Franchise fees and related acquisition expenses related to a new business venture" as an allowable business deduction in connection with your trade or business or in an activity engaged in for the production of income.

As quoted under Section 197 of the IRS Code, “A section 197 intangible is treated as depreciable property used in your trade or business. If you held the intangible for more than 1 year, any gain on its disposition, up to the amount of allowable amortization, is ordinary income (section 1245 gain). If multiple section 197 intangibles are disposed of in a single transaction or a series of related transactions, treat all of the section 197 intangibles as if they were a single asset for purposes of determining the amount of gain that is ordinary income. Any remaining gain, or any loss, is a section 1231 gain or loss. If you held the intangible 1 year or less, any gain or loss on its disposition is an ordinary gain or loss.”

“Franchise, trademark, trade name.   If you buy a franchise, trademark, or trade name, you can deduct the...

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