You’ve decided to become your own boss. There are many benefits to starting a business. As your thoughts turn to a particularly advantageous business model, consider the various franchise tax benefits. That’s only one of many reasons to further explore becoming a Freeway Insurance franchisee.
Look closer at franchise tax benefits and, in particular, insurance business tax strategies.
Unique Tax Benefits of Franchises
A good starting point is with a general understanding of what the franchise business model is all about.
A franchise is an independently owned business built to reflect the image and operations of a successful existing corporation. Franchisees are the owners of the individual franchises. They use the existing company’s name, logo, products or services, and business practices.
Ready examples of franchises are all around us: Holiday Inn, McDonald’s, Freeway Insurance, Fish Window Cleaning, School of Rock, and The UPS Store, to name just a handful of a countless list of businesses in almost every category.
If you choose the right franchisor, you’ll get comprehensive training on how to run your business just like the successful franchisor and receive ongoing support from the experts as you need it.
The franchisor benefits in a number of ways. Franchisees must pay a franchise fee at the get-go, and agree to pay royalties on an ongoing basis for selling the products or services developed and made available by the original company. And that’s where your franchise tax advantages begin.
Business Expense Deductions for Franchises
Start with that franchise fee. It can be for anywhere from a few thousand dollars to six figures or more, depending on the franchise and the complexities of the business. However much you must pay in terms of that initial cost to become a franchisee, it’s an allowable tax deduction. In fact, it can be a significant write-off if you pay a high fee for your business.
Ongoing Operational Deductions
You’ve also got unique opportunities to take franchise tax benefits on a day-to-day basis. Remember the royalty agreement you must adhere to as a franchisee? However it’s arranged — and that varies depending on the franchise — the payment is a legitimate business expense and, therefore, tax-deductible. Be sure to take advantage.
Chances are also good that you’ll have to contribute to the franchisor’s marketing expenses. This is a benefit to all franchisees in that the advertising and marketing campaigns enhance brand recognition and preference among your customer base. And — you guessed it — those payments are tax-deductible business expenses.
Beyond these deductions that are unique to franchise operations, you can take advantage of the deductions that all businesses get, whether or not they’re franchise operations. This means getting write-offs for rent, utilities, supplies, workforce costs, and other expenses necessary to run your operation.
Insurance-Specific Tax Deductions
If you’re thinking of opening a Freeway Insurance location, the tax advantages of owning an insurance franchise might help seal the deal.
In addition to the usual and necessary business expenses that all companies can deduct, insurance agents can also write off the cost of continuing education to maintain their licenses. This may include books, courses, and renewal fees.
And don’t forget the insurance agent business expenses related to purchasing and operating an insurance franchise. Those include tax deductions for your franchise fee, royalty payments to your franchisor, and your share of franchise marketing costs. It all adds up to ample cost-saving advantages of owning an insurance franchise.
Franchise Structure Tax Advantages
Just by being a franchisee, you can benefit in a range of ways when it comes to your tax bill. Here’s what that good news means.
Entity Selection Tax Advantages
There are various decisions you and your tax advisors can make to reduce your tax obligation as a franchise owner. For one thing, you can form an S corporation, which is the top choice of franchisees. It allows your earnings to pass directly into your personal account rather than being taxed first as both a corporation and then added to your personal tax obligation in the form of your salary and bonus earnings. In other words, there’s no “double taxation” on your business and personal earnings when you operate your venture as an S corporation.
A limited liability company, or LLC, offers this same sort of pass-through tax opportunity to avoid double taxation. In addition, it can be simpler to set up and run than an S corporation. Ask your tax advisor for details on both structures and others.
Will you have employees? You can take advantage of various Work Opportunity Tax Credits (WOTC) for hiring people such as veterans, the long-unemployed, the mentally challenged, or various other disadvantaged populations who might have a harder time finding jobs.
Of course, you’ll also take full advantage of the deductions to be found by anyone in any kind of business, whether it’s a franchise or not.
Multi-Unit Franchise Tax Strategies
Some franchise owners start with just one location but find such a golden opportunity in what they’re doing that they negotiate for and buy multiple locations within their territory. This can make great financial sense because of economies of scale. If you can learn all of the ways of efficiently running one business and making it profitable, you can devote what you’ve learned to multiplying that profit by running additional units.
Whatever mistakes you made with that initial franchise operation, you can probably avoid making again with the second and third units, getting to profitability faster with your gained wisdom.
You can also implement the smart tax strategies you made with that first location, making even more deductions for royalties and other franchise start-up and operational costs.
Real Estate and Equipment Tax Benefits
A small box of paper clips is tax-deductible when you own a franchise business. So is your fleet of vehicles, the copier you own or lease, and even the rent or mortgage on your workplace.
The point is, every business expense is a valid deduction from your earnings. That package of paper clips will hardly make much of a bottom-line impression, but your larger expense items certainly will. If you own an insurance franchise such as Freeway, your insurance agent business expenses might start small. At first, you could operate out of your own home (making at least one room a valid business deduction). But as your business grows, there will come a time when you see the need to expand beyond your spare bedroom or kitchen table.
In the first place, you’ll need to hire employees as the business grows — and that means finding a place to base them. You might not look forward to the thought of paying a monthly rent on an office building after your “free” rent at home, but you can find a welcome upside in knowing that your rent will be yet another tax deduction, along with your copier, computers, laser printer, and other pricey gear or equipment.
Retirement and Wealth-Building Tax Advantages
Your initial motive for starting your own business might have been freedom from bosses and the greater ability to determine your earnings and net worth. But at some point, your thoughts will turn to the future — perhaps decades from now — when you wish to retire. What then?
Will you liquidate, sell your home, and move to the Sun Belt? Are others in your family eager to take over? Will you stay on board, but perhaps reduce your time commitment and become sort of a chairman emeritus?
One advantage of owning your own successful franchise is that you will have options as you consider your future. You can sell your successful franchise (or franchises), or you might devote a management team to the goal of continuing to run your operation in much the same way as it’s been run — and to send you a bi-monthly check. Or present the company to a loyal son or daughter and retire on the earnings and investments you’ve already made after years or decades atop a franchise with a record of solid earnings.
That retirement might be largely funded by tax deductions you’ve taken through the years into such savings funds as Solo 401(k), SE-IRA, or SIMPLE-IRA. You should meet with your tax advisors soon after investing in your franchise to figure out the advantages and drawbacks of each of these retirement fund approaches, and see which is right for you. Whichever you choose, the annual deduction will reduce your taxable income.
The smart tax strategies you take in running your franchise through the years can also add to your retirement fund. After all, if you don’t have to pay it to Uncle Sam or other tax agencies, it can legally go into your pocket — or get reinvested back into your company to make it of even higher value when it comes time to sell or pass it along to make your retirement plans a reality.
State-Specific Tax Advantages
Location, location, location. You might have heard that phrase used to explain how one home can be identical to another in another city, state, or even neighborhood, and the resale value of the two properties might differ by hundreds of thousands of dollars. In other words, where the home is located is what matters.
To some extent, the situation is similar in terms of taxation by the state in which you’re based, in terms of tax advantages or disadvantages. Some, such as California and New York, tax at a higher rate than others. A handful of states, including Texas, South Dakota, and Wyoming, have no corporate taxes at all.
Others, such as Florida, Alaska, and, again, Texas, have no personal state income taxes.
But that’s only part of a more complicated story. Some states without corporate taxes might instead tax gross business receipts. Others might be beneficial in terms of overall tax rates, but cost plenty more in terms of real estate costs, employee pay and benefits, and other necessary costs of doing business. Or you could settle into an expensive city in a low-taxing state.
On the other hand, you might find yourself in a territory with a prime customer base and low competition, more than offsetting whatever you’re forced to pay in state and municipal taxes.
The point is that you should consider the state tax rate of where you’re thinking about opening your franchise business, but it’s far from being the only budgetary item worth your consideration.
Conclusion: Maximizing Your Insurance Business Tax Benefits
You’ve got a lot to think about as you consider the tax advantages of owning an insurance franchise — or one from any business category. Your taxes are an unavoidable expense, but as you’ve seen, you can turn them to your benefit by using certain legal strategies.
This means that you need to put your accountant in your brain trust. Your tax advisor should be kept abreast of every move you’re thinking of making, from pursuing the possibility of owning a franchise business to its operation over the years and into retirement.
Take their advice to heart as you calculate insurance agency tax deductions and strategies to get ahead and make the most of your opportunity.
Would you like to learn more about the many tax advantages of owning an insurance franchise and the countless other benefits? No one knows the topic better than your Freeway Insurance franchise representative. Just fill out this form and find out here how to become a Freeway franchise owner. Your future begins now.
