Most franchise royalties and fees are part of the business model. You pay for a proven brand, established systems, ongoing support, and the infrastructure that helps every location operate more smoothly. But when tax season rolls around, the real question is never whether these fees are necessary. It is whether they are deductible.
The answer is not always obvious. Some franchise fees reduce your tax bill right away. Others must be capitalized and deducted slowly over several years. And when you operate multiple locations, the stakes get a little higher. Inconsistent coding, different interpretations of the franchise agreement, and missed documentation can make it harder to know what you actually get to deduct.
This guide breaks down the major categories of franchise fees and explains how they are typically treated for tax purposes.
How Royalties Are Treated for Tax Purposes
Royalties are usually the most predictable fee in a franchise system. They are typically calculated as a percentage of sales, paid on a set schedule, and tied directly to the rights you receive as a franchisee. The IRS treats these payments as ordinary and necessary business expenses. That means they are usually fully deductible in the year you pay them.
Even so, multi-location owners should take a closer look at their royalty activity before year-end. Confirm that each location is recording royalties the same way and that payments match the percentages outlined in your franchise agreement. If you paid any late fees or penalties during the year, those are often deductible too. Just make sure they are clearly separated so your reporting stays clean.
The key is consistency across locations. When every unit treats royalties the same way, your financials become more reliable, and your tax reporting becomes simpler.
How Brand Fund and Marketing Fees Work
Every franchise handles its brand fund a little differently. Some brands separate national marketing fees, local marketing contributions, technology fees, and brand development charges. Others combine everything into a single monthly amount. Regardless of how your franchisor structures it, these fees are generally deductible as long as they relate to advertising or support services that benefit your business.
For hardware stores, this might mean campaigns that drive foot traffic during seasonal promotions. For wellness brands, it could include digital ads, influencer partnerships, or creative materials the franchisor provides.
Before tax season, reconcile what you contributed to the brand fund and compare it to the franchisor’s annual marketing report. Understanding where your dollars went will help you evaluate whether next year’s spend is likely to drive the results you want.
Technology and System Fees You Can Deduct
Technology has become a major cost center for many franchise systems. If you pay recurring fees for your POS system, scheduling platform, CRM, inventory software, or analytics dashboards, those costs are usually deductible as operating expenses. They support day-to-day operations and are necessary for running your locations.
Setup fees or one-time charges may be treated differently. Some onboarding costs need to be capitalized and deducted gradually. If your franchisor rolled out a new system mid-year or if you opened new locations, take a moment to confirm whether any of those costs fall into the amortization bucket. It is better to address this early than fix it after the return is filed.
Initial Franchise Fees Are Not Deducted All at Once
Unlike royalties, your initial franchise fee is not deductible in the year you pay it. The IRS requires these fees to be capitalized and amortized over 15 years. This rule also applies to area development fees, territory fees, and certain onboarding or training charges bundled into the initial agreement.
If you operate multiple locations, make sure each opening is tracked separately. Initial fees tied to a store opening in 2023 should not be mixed with those for a store opening in 2025. When these schedules are maintained properly, you avoid underreporting deductions and keep your tax filings clean for years to come.
Renewal Fees May Need Careful Treatment
Renewal fees are one of the most misunderstood franchise expenses. Some renewals extend your franchise rights for a new term. Others simply maintain what you already have. That difference matters because it determines whether the renewal fee is deductible or amortized.
Review the language in your franchise agreement before tax season. If the agreement extends the life of your franchise rights, the fee may need to be spread out over time instead of deducted immediately. These nuances vary by brand, so it is worth having your CPA take a close look.
Local Marketing Is Fully Deductible
Beyond national advertising, most franchisees invest in local marketing. This includes everything from paid search to mailers to community sponsorships. Fortunately, these costs are fully deductible and provide some of the most direct returns on your investment.
Where multi-location owners get into trouble is with documentation. If every location handles its own marketing, the receipts, invoices, and digital ad summaries can live in different places. The more locations you have, the harder it becomes to track. Before year-end, make sure each unit follows the same recordkeeping process so nothing gets lost when it is time to prepare your return.
Training, Travel, and Compliance Costs Are Deductible Too
Franchise systems often require owners and managers to attend conferences, workshops, operational training, or brand-specific certifications. Travel related to these activities is generally deductible if it is ordinary and necessary for your business.
This is especially true for wellness brands that require specialty certifications or technique refreshers. Hardware store operators may also have mandatory vendor or product training. These costs add up quickly across several locations, so consistent documentation is essential. Keep travel logs, digital receipts, and itineraries in one place so your accountant does not have to hunt them down later.
What You Cannot Deduct
Not every payment connected to your franchise is deductible. Legal penalties, fines, and certain franchisee association dues might not qualify. Fees associated with acquiring a new location may need to be capitalized rather than deducted, especially if they are tied to future franchise rights rather than ongoing operations.
If you paid development fees for locations that never opened, the tax treatment becomes even more specific. Share this information with your CPA so they can apply the correct rules and prevent surprises on your return.
Why Documentation Matters for Multi-Location Operators
For single-unit franchisees, tracking fees is fairly simple. But when you operate 5, 10, or 20 locations, the real challenge is keeping everything consistent. Coding differences, missing invoices, and mismatched interpretations of the franchise agreement create confusion that spreads across your financial statements.
Before year-end, review your internal processes. Make sure royalty payments are coded the same way in every store. Confirm that marketing fees, tech costs, and amortized items follow the same structure. When your data is consistent, your CPA can identify deduction opportunities more easily and provide more strategic advice.
Partner With CPAs Who Understand Franchise Systems
At SAS, we help franchise networks make sense of their financial data and use it to guide strategic decisions. If your royalty fees, marketing contributions, or multi-location fee structures feel confusing or hard to track, our team can help you bring everything into focus.
A clearer understanding of your fees today means stronger performance across your locations tomorrow. If you are ready to get organized and make better financial decisions, we are here to help every step of the way.
