One of the things that you need to be aware of when you first invest in a franchise is that you do have to follow the system and rules set in place by your franchisor. Unfortunately, this can sometimes cost you. For example, franchises may decide to undergo a brand upgrade, requiring their franchisees to remodel their place of business. A mandated remodeling program can be pricey, but fortunately, there are tax breaks available to so that you’ll take less of a hit.
Remodeling Program Tax Breaks
Over the past three years, the National Restaurant Association has negotiated with the IRS over a tax break to aid restaurant owners with remodeling work. It was only recently that they finalized the remodel safe harbor rule.
The remodel safe harbor rule allows franchisees to deduct a large percentage of certain remodeling costs in the first year instead of spreading them out over a larger period of time. This, in turn, allows the tax bill for restaurant operators and retailers to become much lower. This makes any franchisor mandated remodeling program a lot more attractive since it won’t end up costing an arm and a leg, yet they will still be able to take advantage of the location’s facelift.
There are a few other perks as well. For example, franchisees will no longer have to perform costly and complex cost segregation studies to determine what the benefits of a remodel might be. Of course, some may still choose to do this in an effort to maximize their return.
The IRS also made depreciation times shorter, from 39 years to 15 years in some cases. While these shorter depreciation times were a temporary feature in tax law over the past few years, it was only recently made permanent with the PATH (Protecting Americans from Tax Hikes) Act.
How the Tax Deduction Works
Say a franchisee has to do $10 million worth of remodeling across a handful of franchise locations that they own and operate. Before the new rule, they would only get a $660,000 reduction, resulting in tax savings of only $273,000 which would be spread across 15 years. Under the Remodel Safe Harbor Rule, they would get a 75 percent deduction (amounting to $750,000 in the case of this example) in the very first year, which would save millions off their tax bill.
Qualifying for the Remodel Safe Harbor Rule
First of all, everyone’s situation is different which is why careful consultation with a tax advisor is the safe way to go. Additionally, not everybody qualifies for the tax credit. Franchises have to be publicly traded or they have to have audited financial statements. A franchisor with only a few units may not find this to be worth the hassle.
It’s important that you speak with a professional accountant in order to determine whether you qualify for the Remodel Safe Harbor Rule and how much you would be able to save on your tax bill depending on the cost of your remodel. To speak to a professional business accountant today, be sure to contact us at Valezar & Associates.