Published January 31, 2012

Franchise Business Owners Provide Their Views on Tax Reform

Benjamin Franklin said, “In this world nothing is certain but death and taxes.” Taxes are a guarantee, but the exact parameters of our obligations are shifting. As Congress debates tax policy, it’s very likely that sooner or later changes will be made in the enormously complex U.S. tax code. Meanwhile, franchise executives are left to make educated guesses about their business plans in light of the uncertain direction of tax reform.

Reform is definitely needed, because the United States tax code is a thicket. North of 65,000 pages long, the code was modified 579 times in 2010—that’s more than one change each day. The code is so extraordinarily complex that taxpayers in the United States spend a combined 6.1 billion hours preparing tax returns every year, the time equivalent of one year of full-time work for 3 million Americans. Some economists have estimated the cost of tax compliance to be more than $400 billion per year.1

Although the need for a simpler tax system is clear, the changes attendant to deficit reduction and the expiration of Bush-era tax cuts remain out of focus. Tax uncertainty makes routine decision-making, like hiring, more difficult, especially as franchise executives struggle to regain ground lost during the recession.

Two factors affected respondents’ concern-levels: the tax organization of the business, and the size of the business.

With the shadow of tax overhaul looming, the International Franchise Association and Franchise Business Review asked franchise executives to weigh in on several pending tax proposals and comment on tax reform in mid-October 2011. More than 400 franchisors and franchisees took part in the study, which uncovered the following key findings.

Two factors affected respondents’ concern-levels: the tax organization of the business, and the size of the business. In general, franchisees who pay the corporate tax were more concerned about tax increases than their pass-through counterparts. Franchisors organized as pass-through entities were more concerned than those paying the corporate tax.

One tax change proposed at the time of the survey would trade current tax deductions for a lower corporate tax rate. Eighty-three percent of franchisors, 58 percent of multi-unit franchisees, and 50 percent of single-unit franchisees would be willing to make the trade. Of those, 83 percent of franchisors, and 54 percent each of multi-unit franchisees and single-unit franchisees would require a corporate tax rate of 20 percent or less to justify the exchange.

The tax proposals IFA examined hit harder as the size of the franchise business increased. For example, when asked how a 3.5 percent tax increase on households earning more than $250,000 annually would affect their businesses, 89 percent of franchisors expected a negative or significantly negative (48 percent) result. When asked the same question, 64 percent of multi-unit franchisees expected a negative or significantly negative (39 percent) impact. Even though franchisees that own and operate a single location generally have a lower pre-tax income than their multi-unit counterparts, 36 percent still anticipate negative or significantly negative (13 percent) effects. Ten percent of single-unit franchisees weren’t yet certain of the result. None of the respondents expected a positive or significantly positive impact.

Franchisors and franchisees agreed that the single most important tax credit was for the employer contribution to health care.

Although only 22 percent of the franchisee survey respondents were multi-unit operators, this group accounts for over two-thirds of the franchise businesses potentially impacted by these proposed tax changes. These business owners represent the franchise industry’s greatest opportunity for revenue and job growth. The current uncertainty is stifling their growth, and the broader benefit this growth would have on the economy as a whole.

The survey also asked questions about the value of tax credits and deductions. When IFA asked which tax deductions or credits were more important, franchisors and franchisees agreed that the single most important tax credit was for the employer contribution to health care. Other top-rated credits and deductions include the deduction for depreciation of equipment and reduced taxes on long-term capital gains.

The question of whether, when and how tax burdens will increase is already affecting the decisions of franchise executives. According to one survey participant, “Businesses are hesitant to expand because they are uncertain of future tax policies and the impact of new regulation.” The implications of this concern are serious, especially considering the role of small businesses in the economic turn-around.

In this climate of uncertainty, IFA continues to press lawmakers to consider the implications that tax reform will have on franchise businesses while supporting bipartisan jobs legislation such as the American Growth, Recovery, Empowerment and Entrepreneurship Act. As tax laws change, IFA will provide regular updates to members through press releases and postings to the association’s website, www.franchise.org.

Eric Stites, CFE, is the founder and CEO of Franchise Business Review. Blaire Jones is a research coordinator for the International Franchise Association. Stites can be reached at 603-433-2266 and [email protected]; Jones at 202-662-0796 or [email protected].

Source of Information
1Howard Gleckman, Christian Science Monitor, www.csmonitor.com/Business/Tax-VOX/2011/0107/Biggest-problem-facing-taxpayers-The-tax-code (January 7, 2011).

About the Author: Eric Stites

Eric leads FBR’s research and consultants with clients in the area of franchise performance. He is an active member of the International Franchise Association (IFA), serves on the IFA’s VetFran and Franchise Relations Committees, and speaks frequently on topics related to franchise relations and best practices in franchising. Eric lives on the coast of Maine with his wife and two daughters, and enjoys spending as much time as possible on the ocean.
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