Question

Franchise investment

Forum|Forum|2 years ago
February 5, 2024
1 reply
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I own an LLC that in 2023 invested in a franchise. The investment was $47,000. The business is on a cash basis for accounting. I liquidated my IRA to make that investment. Going through the business on , it won't allow me to deduct in full the investment. Without that deduction, I am being taxed on the IRA liquidation.

Can you help?

Not A Product Question

M

MinhT1

A franchise is an intangible asset which has to be amortized over 15 years. See this IRS document.

You can't deduct the entire cost of the franchise in the year of purchase.

Your IRA withdrawal is taxable and if you are younger than 59 1/2, also subject to the 10% early withdrawal penalty.

Unfortunately, you can't do otherwise.

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F

FrtzcatAuthor

Thanks and that is what I found. Doesn't make sense. The cash out in 2023 was over $89,000. I get the "intangible" asset amortization. Now, I paid $42,000 for the startup and training for the franchise in addition to the fee. Again, cash basis accounting considers that an expense and where can I post that in Turbo Tax?

Thanks for your help.

Frtzcat

R

RobertB4444

Thanks for the answer. The $42,000 is comprised of two components. Start up supplies where I have an invoice for $16,000 and the franchise training which I paid for in advance and the training was conducted in January. I recognize the $47,000 as an intangible and will take one month's amortization, but I want to deduct the $42,000 since I am a cash basis business.

What do you think? I respect your advice.

Thanks,

Frtzcat

Start Up costs are the things you have to do to get your business ready to begin. In your case you had to pay a franchise fee and go to a franchise training class. These are things of value that should last over the useful life of the business and therefore are amortized over time.

Start Up supplies, though - those sound like they might be things that are used up in the first year of business. If you start a restaurant the first meat that you buy is not part of your start-up costs - it's supplies that are consumed immediately.

So only you know really. When you're entering the start up costs you enter the things that you bought and paid for to start the business, that are going to last for more than a year and provide value over their useful life. That's the same rules for determining what is an asset that needs to be depreciated as your business continues.

When entering expenses they should be items that will be used up within a year. So the $16,000 that you have here as start up supplies sounds like it's probably an expense. But only you really know that.

Starting a new business can be a lot. Good luck!

@Frtzcat

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