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Tax Relief on the Table

© Michele Marrinan

If you're a franchisee, chances are you feel like an entrepreneur. You own the business, after all. So why shouldn't you get all the perks that other small business owners get. Like tax relief. Believe it or not, you don't.

Legislation aimed over the past few years at helping small business owners in the areas of labor law, tax policy and the minimum wage, has passed by franchisees. They may have too many employees to qualify as a small business, or their sales may exceed a certain limit. Uncle Sam can't seem to see beyond the large, powerful franchisor at the top of the organization. Rep. Ron Lewis (R-KY) has set out to change that with the Small Business Franchise Tax Relief Act of 1999. He's looking for co-sponsors for the legislation and plans to introduce it in a few weeks.

"Franchise industries are one of the fastest growing sectors for small business," says a spokesperson for Rep. Lewis. "It makes up 18 percent of small businesses now. Rep. Lewis feels that there are certain things in the tax code that ought to be changed to facilitate franchises."

The legislation proposes two changes:

1. Accelerated Depreciation. Under current law, the depreciation schedule for real estate improvements stands at 39 years. That's not much of a help to franchisees, since franchise contracts generally run 15 to 20 years. Not only that, but franchisors often require rehabilitation and refurbishment of a location within seven to 10 years. Rep. Lewis would like to accelerate the depreciation schedule for franchisee real estate/building improvements to 15 years.

2. Capital Gains. Current law doesn't give capital gains treatment to the sale of franchises, since franchisors retain the right to approve transfers, terminate the franchise, and impose quality controls and brand-name requirements. Rep. Lewis' points out that many franchisees spend years building a business, only to pay 30 percent or more in taxes when it comes time to sell. He would give them the preferential capital gains treatment, under certain restrictions.

The proposal has been greeted with cautious optimism by franchisee advocates. "It sounds like a no-brainer for franchisees," says Bob Purvin, president of the American Association of Franchisees and Dealers (http://www.aafd.org), about the bill. "We are trying very hard to secure more of the benefits of other small businesses. So in that regard, we would absolutely endorse this bill."

Purvin is quick, however, to identify the reasons franchisees' are often mischaracterized by such entities as the Internal Revenue Service (www.irs.gov) and U.S. Small Business Administration (www.sba.gov). He says that franchisors won't allow it. They have, Purvin says, created a "sharecropping situation" for franchisees by retaining too much control over franchisee operations. And he's got examples to back up his claim. There were the franchisees who couldn't get SBA loans because their franchisor exercised too much control over them. Then there was the franchisee who was accused by a government agency of disguising himself as a small business. The franchisee had bid on a government contract reserved for small businesses.