Franchises

Question 1

Franchisor retains significant power and rights

Noncontingent & contingent payments to the franchisor are?

Answer 1

Ordinary Income

Question 2

Franchisor Retains (doesn’t retain) significant power and rights

Franchisee makes contingent payments

Answer 2

Ordinary deduction.

Question 3

Franchisor retains (doesn’t retain) significant rights and power

Franchisee makes noncontingent payment, payment is?

Answer 3

Capitalized and amortized over 15 years as an ordinary deduction.

If the franchise is sold it is subject to §1245 recapture

Question 4

Franchisor doesn’t retain significant power or rights

Franchisor receives noncontengent payments

Answer 4

Capital gain if franchise rights are capital asset

Ordinary income if franchise rights are ordinary asset

Question 5

Franchisor doesn’t retain significant rights or power

Franchisor receives contingent payments

Answer 5

Ordinary Income