How Do Tax Credits Work for Franchises? Your Total Guide – 2022

June 3, 2021

As a franchise owner, you might be wondering, how do tax credits work? Tax planning is an essential part of owning and operating a small business franchise. And, there are several tax breaks, credits, and incentives available for your franchise's 2021 tax return.

Learn everything you need to know about how tax credits work for franchises in 2021. Find out how to create a franchise tax plan that makes the most of your business expenses. And, discover the most important areas of consideration for getting the maximum benefit available to your franchise on next year's return.

How Do Tax Credits Work? The Total Franchise Tax Guide – 2022

How do tax credits work to help new franchise owners, and what steps go into tax planning for franchises? The 2018 Tax Reform Plan provides several avenues by which to limit your franchise's tax liability and help enable economic independence. Some of the most available tax credits for franchises include the Work Opportunity Tax Credit (WOTC), General Business Tax Credit (GBTC), and the FICA Tip Credit.

Furthermore, the tax credits and incentives available to your franchise can change dramatically based on the State and Local Taxes in the location of your business's operation. If you buy into a franchise that operates in multiple states it is important to understand your location's tax liabilities. And, franchisees can take advantage of cost segregation and accounting methods that offer additional tax incentives down the road a few years.

The Work Opportunity Tax Credit (WOTC)

One of the most overlooked tax credits available to franchisees all over the country is the Work Opportunity Tax Credit. The WOTC offers franchisees a financial tax incentive to hire workers that fall into certain categories and groups. These groups can include veterans, individuals receiving financial aid, ex-felons, and individuals with disabilities. Your total tax credit is ultimately based upon the wages earned by employees who fall into one of these qualified groups.

In the first year, the WOTC can amount to 40% of the qualified worker's annual wages, and it can increase up to 50% of wages in the second year. This credit can be applied to an unlimited number of qualified employees. The total credit per employee, however, cannot exceed $9,600.

Accounting Using the Cash Basis vs Accrual Basis

The cash basis of accounting is easier, but the accrual method offers a more accurate and detailed financial overview and forecast in the future. Cash basis accounting deals with the cash flow of your franchise, without worrying about accounts receivable and payable. But, accounting by accrual basis can help to defer some of your franchise's tax obligations. If your franchise has average gross receipts of no more than $25 million over the past three years, your franchise is eligible to utilize the cash basis method. If your franchise averages more than the $25 million gross receipt threshold over the past three years, the IRS mandates the use of the accrual basis method.

Cost Segregation Tax Benefits

When your franchise spends money to improve infrastructure and more, depreciation factors into your tax liability. Usually, this depreciation process takes up to 39-years, but a cost segregation study can speed things up and help your franchise come to a faster tax benefit realization. In a cost segregation study, assets are separated into more detailed categories that can often carry a much shorter depreciation term.

For instance, a cost segregation study might be able to separate your building renovation into smaller elements, allowing you to claim accelerated depreciation on a portion of your expenses in the first year of building. Look to take advantage of a cost segregation study in the first year of building, renovating, or owning your franchise to get the most tax savings. And, if you have missed opportunities in past years to claim depreciation, you can amend your franchise's previous return back as far as 1987.

Running a successful franchise business means knowing how to use the tools at your disposal to generate wealth and save money. And, these are only a few of the ways you can save more and maximize your franchise's tax benefits in 2021. Talk to a Creative Colors International associate to learn more about how tax credits work and how you can generate wealth owning your franchise.