Franchise Owners, CPA & Tax Services

Why Franchise Owners in Dallas Need a CPA Who Knows Franchising

Franchise ownership comes with a tax structure that looks nothing like a typical small business. You have initial franchise fees that must be amortized over 15 years under IRS Section 197, ongoing royalty payments that affect your effective margin, advertising fund contributions with their own deductibility rules, and (if you own multiple units) entity structuring decisions that can save or cost you tens of thousands of dollars every year. A general-practice CPA who treats your franchise like any other business will miss deductions, misclassify expenses, and leave money on the table.

At AG Freideman, we work with franchise owners across Dallas, Plano, Frisco, McKinney, and the broader DFW metro who operate everything from quick-service restaurants to fitness studios to home-service brands. Al Freideman, a licensed CPA with over 30 years of experience, handles every franchise client personally. That means the same person who reads your Franchise Disclosure Document is the one preparing your return, reconciling your books, and advising on your next unit acquisition. With 52 five-star Google reviews and transparent pricing, we deliver the specialized attention franchise owners deserve.

How Do You Amortize a Franchise Fee for Tax Purposes?

Your initial franchise fee is not deductible in the year you pay it. The IRS classifies franchise fees as Section 197 intangible assets, which must be amortized over 15 years (180 months) using the straight-line method. If you paid a $45,000 franchise fee, you deduct $3,000 per year, or $250 per month, for the next 15 years. This applies regardless of your actual franchise agreement term.

The same 15-year amortization rule covers other costs tied to acquiring the franchise: territory rights, training fees bundled into the franchise agreement, and any premium paid for an existing location’s customer base. However, certain startup expenditures (like travel to discovery days or pre-opening training costs not included in the franchise fee) may qualify for the Section 195 startup expense election, which allows you to deduct up to $5,000 immediately in your first year of business, with the remainder amortized over 180 months. That $5,000 threshold phases out dollar-for-dollar once total startup costs exceed $50,000.

Getting this classification right from day one matters. We review your FDD, itemized closing statement, and any side agreements to separate true Section 197 intangibles from deductible startup costs, so every dollar lands in the right category on your 2026 return.

Royalty Payments and Ad Fund Contributions: How Are They Deducted?

Ongoing royalty payments to your franchisor are fully deductible as ordinary business expenses in the year you pay them. These typically range from 4% to 8% of gross revenue depending on the brand, and they reduce your taxable income dollar for dollar. There is no amortization requirement for ongoing royalties because they are recurring operating costs, not capital expenditures.

Advertising fund contributions (often 1% to 4% of gross revenue) are also deductible as advertising expenses, but they require careful tracking. Some franchise systems pool ad fund dollars into a national or regional cooperative, while others require local spending minimums. If your FDD mandates that you spend an additional 1% on local marketing beyond the ad fund contribution, those local expenditures are separately deductible as well. We categorize each layer properly in your books so nothing gets buried or double-counted.

One area where franchise owners run into trouble is technology fees, brand development fees, and other line items the franchisor adds over time. These are generally deductible as ordinary business expenses, but some franchise agreements bundle capital improvement requirements (like a mandated remodel every seven years) into ongoing fees. Capital improvements must be depreciated, not expensed in full. We review every fee category in your franchise agreement to ensure the right tax treatment.

Multi-Unit Entity Structuring for Dallas Franchise Owners

If you own or plan to own more than one franchise unit, how you structure your entities can significantly affect your tax liability, personal asset protection, and ability to secure financing for future locations. The most common approach for multi-unit franchise owners in Texas is a separate LLC for each location, with all LLCs owned by a single holding company (often taxed as an S-Corp).

This structure provides several advantages. Each location’s liabilities stay contained within its own LLC, so a lawsuit or lease default at one unit does not expose the assets of your other locations. The S-Corp holding company allows you to pay yourself a reasonable salary and take remaining profits as shareholder distributions, which are not subject to self-employment tax (15.3% for 2026 up to the Social Security wage base of $176,100, then 2.9% on earnings above that threshold).

Texas does not have a personal income tax, but it does impose the Texas Franchise Tax (margin tax) on businesses with annualized total revenue above $2.47 million. For franchise owners approaching or exceeding that threshold across multiple units, proper entity structuring determines whether each unit files separately (potentially staying below the no-tax-due threshold of $1.23 million per entity) or files as a combined group. We model both scenarios for multi-unit clients to identify the structure that produces the lowest combined tax burden while staying fully compliant with the Texas Comptroller’s combined reporting rules.

Ready to discuss entity structuring for your franchise? Call Al Freideman directly at (972) 893-3481 or book a free consultation at agfreideman.com/meeting/.

FDD-Required Financial Statements and Franchise Compliance

If you are a franchisor or a sub-franchisor operating in Dallas, the FTC’s Franchise Rule (16 CFR Part 436) requires audited financial statements in Item 21 of your Franchise Disclosure Document. Even as a franchisee, your franchisor may contractually require you to submit reviewed or compiled financial statements on a quarterly or annual basis. These are not the same as your internal QuickBooks reports.

We prepare franchise-compliant financial statements that meet both your franchisor’s reporting requirements and generally accepted accounting principles (GAAP). For franchisees, this typically means properly classifying franchise-specific line items (royalties, ad fund, technology fees, initial fee amortization) so your P&L matches the categories your franchisor expects. Clean, accurate financials also strengthen your position when applying for SBA loans or conventional financing for additional units, because lenders want to see unit-level profitability separated from overhead.

Franchise Owner Tax Mistakes We Fix

After 30 years of working with business owners in Dallas and across Texas, we see the same franchise-specific errors come through our door repeatedly. Here are the most common ones we correct:

• Expensing the initial franchise fee in Year 1. This is a Section 197 intangible asset. The full amount must be amortized over 15 years. Deducting it all at once triggers an IRS adjustment and potential penalties.
• Failing to separate pre-opening costs from the franchise fee. Travel, employee training before opening day, and pre-opening rent often qualify for the Section 195 startup deduction (up to $5,000 immediately). Lumping everything into the franchise fee means you lose that first-year deduction entirely.
• Running multiple units through a single entity. This exposes all locations to the liabilities of any one unit, inflates your Texas Franchise Tax obligation by combining revenue, and makes it nearly impossible to sell or transfer a single location cleanly.
• Misclassifying franchisor-mandated remodels as repairs. A required buildout or remodel is a capital improvement that must be depreciated (typically over 15 years for leasehold improvements under the qualified improvement property rules). Expensing it as a repair overstates deductions and draws IRS scrutiny.
• Ignoring Texas sales tax obligations on bundled services. Some franchise models bundle taxable goods with services. Texas charges 6.25% state sales tax plus up to 2% local tax (8.25% maximum), and incorrect collection or remittance leads to Comptroller audits and back-tax assessments with penalties.