Question

Question on tax codes for franchise purchase

Forum|Forum|2 years ago
March 3, 2024
2 replies
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I made a purchase of a kid's sports camp franchise and the purchase agreement shows the following:

Goodwill and intangible assets for Territory - $74,667

Franchise fee - $5,000

As a part of that purchase, we also inherited about $5,000 worth of sports equipment.

In Turbo Tax, I designated the $74,667 and the $5,000 as Class VII assets and section 197 intangibles. However, I'm now wondering if one or both of those costs are actually section 195 "start up costs" instead.

Anyone have any thoughts?

TurboTax Business Windows

M

MinhT1

These are not startup costs.

Startup costs include any amounts paid or incurred in connection with creating an active trade or business or investigating the creation or acquisition of an active trade or business. Organizational costs include the costs of creating a corporation or partnership.

The goodwill and intangible assets and the franchise fee are Section 197 intangibles and are to be amortized over 15 years. See this IRS document.

The used sports equipment is a fixed asset which can be depreciated over 5 years.

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I

iketricktorAuthor

Okay makes sense.

Would the $5,000 value of the sports equipment be considered part of the $74,667? Ie in the depreciation section, would I list $5,000 for equipment and then $69,667 for goodwill? Or would I list $5,000 for equipment and $74,667 for goodwill?

M

Mike9241

Goodwill:

Goodwill is an intangible asset that represents the value of a business beyond its tangible assets (such as equipment, inventory, and property).
Goodwill typically arises when a business is purchased for more than the fair market value of its net assets.
While goodwill is an important aspect of business valuation, it is not considered a start-up expense for tax purposes.
Instead, goodwill is typically amortized over a longer period (usually 15 years) as part of the business’s overall depreciation and amortization schedule

Same for Franchise Fee

Recoverable start-up costs for purchasing an active trade or business include only investigative costs incurred during a general search for or preliminary investigation of the business. These are costs that help in deciding whether to purchase a business

PatriciaV

If you did not specifically pay for the sports equipment, it has no basis for depreciation and would not be recorded as a business asset. The entire purchase cost would be goodwill, with the franchise fee amortized separately.

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