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. ...view middle of the document...
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 amount you pay or incur as a business expense only if your payments are part of a series of payments that are:
1. Contingent on productivity, use, or disposition of the item,
2. Payable at least annually for the entire term of the transfer agreement, and
3. Substantially equal in amount (or payable under a fixed formula).
When determining the term of the transfer agreement, include all renewal options and any other period for which you and the transferer reasonably expect the agreement to be renewed.
A franchise includes an agreement that gives one of the parties to the agreement the right to distribute, sell, or provide goods, services, or facilities within a specified area.”
“Legal and professional fees. Fees charged by accountants and attorneys that are ordinary and necessary expenses directly related to operating your business are deductible as business expenses. However, usually legal fees you pay to acquire business assets are not deductible. These costs are added to the basis of the property.”