When it comes to filing taxes for your franchise, it’s all about reducing your tax liability and maximizing your return. Tax professionals are skilled at interpreting tax codes and analyzing your business to determine your best strategy.
Ready to make your 2020 filing efficient and successful? Here’s where to start.
Know your business
Your entity type doesn’t just protect your personal liability, it impacts how your taxes are calculated. Options included LLCs, corporations, S corporations, sole proprietorships, and partnerships.
LLCs and corporations are the most common type of business structure for franchisees, but S corporations are increasingly popular following the TCJA in 2017. Why? The TCJA now allows pass-through business entities, which include S corporations, partnerships, and sole proprietorships, to deduct up to 20% of qualified business income.
Area of operation
It doesn’t just matter what type of entity you are – it matters where you do business. Each state has different tax requirements that must be held in balance to stay in compliance. This is challenging enough to do for operations in one state, but what if you own three Waffle Houses in Kansas City, Missouri and one in Kansas City, Kansas? Owning businesses in multiple states alter your state and local tax (SALT) exposure, which in turn can alter your liabilities.
Even having a sales presence in a state can be enough to change your tax requirements. Numerous states require registered businesses to pay what is known as a “franchise tax.” So even if you just cross state lines to close a deal, you may face additional requirements.
Note, the franchise tax isn’t a tax on all franchises, but rather tax you pay for the privilege of doing business in a state.
What you can (and can’t) deduct
While the Tax Cuts and Jobs Act of 2017 shifted the tax landscape for pass-through businesses, it also made some changes for business owners’ deductions. One of the biggest changes was an increased cap for business expense deductions. Home offices, office equipment, software and technology, insurance premiums, and retirement contributions are all potential tax write-offs.
Another change based on the TCJA is how business meals and entertainment are deducted. While 100 percent of business meal expenses are now deductible, entertainment expenses are now off-menu. That means you can take clients out for dinner, but don’t expect to write off a trip to the golf course.
Traveling for business can do more than collecting Delta miles. When you’re a business owner, your business and travel expenses are deductible. Airfare, car rentals, and lodging qualify as well. Business travel deductions don’t have to be long-distance, either. Local travel, including regular commuting in your own vehicle, can be written off on your taxes.
Note: There are several ways to handle deducting your travel expenses, so to speak with the tax professional about which approach makes the most sense for you.
If you own a franchise, you’re paying franchise fees. These fees include a one-time initial start-up fee, which can range from $20,000-50,000, and ongoing marketing fees and royalties. Given that it cost a pretty penny to start a franchise, being able to deduct these fees on your taxes is a big tax incentive.
Deductions are great, but tax credits are also a helpful mechanism for maximizing your tax return. For franchises, there are two valuable tax credits to use: the Work Opportunity Tax Credit and the FICA tip tax credit. WOTC reduces income taxes for companies that hire from targeted demographic groups, such as qualified veterans, qualified ex-felons, or individuals with disabilities.
Another tax credit is the FICA tip credit, which is available to business owners whose staff earn tips such as restaurants. The credit is based on the share of FICA and Medicare taxes they pay on an employee’s reported tip income. The credit is part of the General Business Tax Credit and while the credit isn’t refundable, it won’t reduce your liability below $0. However, the unused portion of the credit is carried forward and applied to future returns
Work with the professionals
The more you know about your options when it comes to paying taxes, the better equipped you will be in April. Familiarize yourself with the processes, the documentation, and the expectations for your particular business. However, it’s always recommended to work with a professional to get the job done.
The IRS tracks thousands of lines of tax code and you likely aren’t keeping tabs on all of them. Tax professionals can help you take advantage of all possible deductions and develop the best strategy for your franchise.