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How To Use A Non-Food Franchise To Create A Depreciable Income-Producing Asset

by | Jul 19, 2023 | Blog

Ever heard of the idea of investing in a depreciable income-producing asset?

It’s a way to potentially reduce one taxable income stream by opening a new income stream.

And it’s possible to pull this off by investing in a non-food franchise

Here’s the idea…

But first, a disclaimer:

I’m not an accountant. In no way shape or form should you take tax advice from a non-food franchise guy like me. You’ll need to find a good small business accountant to help you with this strategy. And you certainly shouldn’t open a new business just to get some tax advantages…think of it like an added bonus if you’re itching to start your own business.

Alright, back to the idea…

Let’s say you generate an income that gets taxed at the full rate (like a W2 job, profitable business, or real estate).

And you have the entrepreneurial itch to start a business to open up another income stream.

Maybe you have some flexibility in your day job or your spouse is itching to do something new.

The point is, you have some extra time and money to invest in a business.

Look Into Semi-Absentee Franchises

From the franchise perspective, you could focus on some non-food franchises that can be run semi-absentee.

A semi-absentee franchise can enable you to keep your W2 income stream that’s getting taxed at the full rate while you build the franchise.

Basically, semi-absentee is a fancy way of referring to a manager-run franchise model.

You see, most semi-absentee franchises operate out of a brick-and-mortar location like a shopping center.

They need equipment, upfitting, improvements, etc.

This is where the depreciation opportunity comes in.

Because most of the stuff you need to open a semi-absentee franchise can be depreciated.

And depreciation is basically a way to take a non-cash expense (i.e. “paper expense”) on the profit and loss statement.

Even if you financed all of this stuff.

And, the best part is, you can typically accelerate the depreciation schedule and depreciate most of it in the year you buy it (even if you finance it).

So if it takes a good chunk of months to find a location, upfit it, get all the equipment and stuff you need, you could try to time it where you’re incurring depreciable costs in one year and opening in the next year or something like that.

And if you open multiple locations, you can rinse and repeat.

So, if you find a non-food franchise that you like and can operate while you keep your W2 income there’s a potential opportunity to leverage it to help reduce your overall taxable income.

Here’s an example…

I helped a real estate entrepreneur find a franchise that he used to pull off this strategy.

He’s actually the one who taught me to think like this.

This guy had built a large portfolio of rental homes.

He had a team who ran this business so he had some bandwidth, was savvy, and was itching to diversify.

He ended up investing in some value haircare franchised salons.

Mind you, if you met this guy, you would never peg him as a guy who owns a bunch of salons.

Why value hair care?

It was a manager-run business model (so semi-absentee)

Recession resilient (everyone has to get their haircut, right?)

Multi-unit potential (it’s scalable and he can rinse and repeat the depreciable income-producing asset play)

I talked to him the other month and he told me he’s up to something like 30 locations.

Has a management team in place.

And just bought a house in Hawaii.

He’s happy.

Mind you, this is not all rainbows and sunshine.

It’s taken a lot of work to get to this point.

And, again, I’m not saying you should go out and buy a non-food franchise because of potential tax advantages.

For instance, if you sold your franchise before the deprecation schedule is up, you’ll probably need to recapture some of this deprecation.

But, it’s an interesting strategy to think about investing in a franchise as a long-term income and tax strategy.

I’m sharing this as an example of another way to think about franchise investing.

Again, talk to a good small business accountant about all of this.

And if you want to explore some non-food franchises that could help you pull this off, reach out anytime.

The First Step is a Conversation.

If you have that burning desire to build your own successful business so you can live a life you can only have working for yourself, let’s talk.

The First Step is a Conversation

The first step is a pretty simple one: We have a conversation.

After we speak, we’ll be able to figure out if there is a good fit to work together.