Sub-franchises, also called “unincorporated companies” in the tax code, are business entities that hold their own separate entity.
Many have no registered owners, and are often exempt from state and federal income taxes, although there are some exceptions.
In 2017, the IRS made changes to the franchise tax code to make it easier for businesses to obtain “tax-exempt status” through franchise agreements.
The Taxpayer Protection Act of 2017 (PPA) This bill is named after one of the founding members of the United States Congress, Republican Rep. Darrell Issa.
As of 2017, there were nearly 3,000 franchisors, and over 30,000 LLCs, with an estimated $1.4 trillion in revenues.
According to a recent report from the National Association of Franchise and Association Councils (NAFAC), franchisees collectively have $14 billion in sales, with $7.2 billion in wages.
The tax code is currently set to expire in 2024.
“This bill provides relief for businesses that have franchise agreements,” Issa said in a statement.
“This will provide certainty to businesses that are forced to file taxes on their profits in anticipation of a change in federal tax law.”
However, the legislation also makes it easier to challenge tax deductions and credits in court.
Taxpayer protection also provides an opportunity for businesses, especially small businesses, to avoid a potential increase in the value of their franchises, as well as potential liability for future tax liability.
Franchising tax board The tax code’s Franchise Tax Board (FTB) is the authority charged with determining whether a franchise is legal under federal and state law.
The FTB has jurisdiction over franchisees under federal law, as long as they have been in existence for more than six years and have no income from an operating source.
However, there are two states where franchisees can have tax exempt status, New York and Vermont.
Under the tax codes New York state, franchisor entities must provide an exemption from state taxes on income from the operations of their franchisees, which include: a) wages, including tips and commissions, and b) interest and dividends.
Vermont is one of two states that allows franchisores to have their income exempt from income taxes on a business income basis.
Under New York law, franchising income is taxed as wages and salaries.
In Vermont, franchisees must provide a statement that the business is not operating a business that has a business license and that the franchisee is not required to collect income tax from any customers or employees.
The FTBs authority is set to end in 2020.
Franchisors can also claim tax credits on their franchise income, such as the exclusion from state income taxes of certain payments, such a payment made by the franchisorship or by the owners of a building owned by the franchise.
Some franchisoring businesses are eligible for tax credits that include state income tax credits and refundable credit credits.
Many franchisored businesses are also eligible for income tax breaks.
Other states exempt franchisory businesses from state or local income tax, including Delaware, Iowa, Michigan, New Hampshire, Rhode Island, Vermont, and Wyoming.
For more information on the tax law, see The Franchise Tax Act of 1916 and Franchise Tax Exemption Act of 1975.
According to a report by the National Taxpayers Union, over 2.1 million franchisings were in operation at the end of 2018.
This figure includes only those franchisorial businesses that did not have franchisees in the state in which they operated.
The number of franchisories is expected to increase in coming years.
Frenemy tax board members The IRS has several fiduciary duties when considering a franchising tax waiver, such with the franchising board, the Franchise Tax Commissioner and the Commissioner of Internal Revenue.
In 2018, the Taxpayer Relief Act of 2018 (TRRA) passed with bipartisan support, which required the IRS to waive or modify certain franchise tax laws to protect taxpayers from franchise tax liability, including franchise tax exemption, for certain taxpayers.
Although the Tax Code does not explicitly prohibit the IRS from waiving or modifying franchise tax legislation, there is no specific provision in the Tax Act prohibiting the IRS.
“The Tax Act does provide a mechanism to protect the tax-paying taxpayer,” said John P. Fifer, director of tax policy and compliance for the National Federation of Independent Business, which represents more than 4 million independent business owners and has more than 40,000 members.
“The Taxpayers Protection Act does not.
It provides an avenue for a taxpayer to seek a waiver.
It does not make it mandatory.”