As an outsourced CFO who works exclusively with franchisors, I’m always watching the legislative landscape for changes that could impact franchisor financail strategy. The proposed tax bill—H.R. 1 from the 119th Congress—has major implications for franchise businesses, both at the brand and unit level.
Although it hasn’t been passed yet, understanding its contents now can help you make informed decisions about growth, compliance, and exit strategies. While the Senate is likely to make changes, many of the material items will be upheld. As such, it is good to know how some of the provisions could impact your system. Below, I’ll walk through the most important provisions from a franchise CFO’s perspective, with action steps you can take now.
Corporate and Pass-Through Tax Changes Could Benefit Franchisors and Franchisees
H.R. 1 proposes a permanent extension and expansion of the Qualified Business Income (QBI) deduction—commonly referred to as the pass-through deduction. This deduction currently allows small business owners to deduct 20% of their qualified income. Under the proposed bill, this would increase to 23% starting in 2025, and would no longer be set to expire after 2025.
The Qualified Business Income deduction—also called the 20% pass-through deduction—is a tax break that allows small business owners to deduct up to 20% of their business income from their taxable income on their personal tax return. While you may not be aware of this, your tax preparer is most certainly saving you (and your franchisees) thousands of dollars a year in taxes because of this.
Implications for Franchisors:
- Many franchisors operate through pass-through entities—this expansion could improve after-tax profitability and cash flow.
- Franchisees in QSR, retail, or home services who qualify for the deduction could see a reduction in their personal income tax burden.
Action Step: Communicate this potential benefit to your franchisees. It’s a great opportunity to support their long-term tax planning and cash flow strategy—without giving tax advice, you’re simply helping them have better conversations with their CPA.
Expanded Depreciation Deductions Could Accelerate Franchise Growth
Franchise systems that are opening new units or remodeling existing locations may benefit from expanded tax breaks under H.R. 1. The bill extends and enhances both bonus depreciation and Section 179 expensing.
Why It Matters:
- Franchisees can deduct 100% of many buildout and equipment costs up front, improving early-stage cash flow.
- Higher Section 179 limits mean larger write-offs for furniture, signage, HVAC systems, and technology upgrades.
Action Step: This is something that is great for your development team to know. As they are talking with prospects, they can mention that tax breaks with opening a new business they could incur with the 100% expense of capital expenditures. Further, you may encourage franchisees to update or remodel existing locations in the next couple of years because of this same change.
It is important to note that this does not provide small businesses more deductions. Instead, it merely accelerates them. For instance, a new truck purchased for $30,000 may have required expensing for tax purposes over five years, or $6,000 per year. Under the proposed law, it would now be 100% deductible in the year purchased. In both scenerios, the tax deduction is the same, however, the period taken is different.
Again, don’t provide specific advice to franchisees, but do let them know of potential strategies to discuss with their tax advisor.
Labor Classification Rules Could Cause Trouble for Franchisees
One of the bill’s less-publicized changes is a stricter interpretation of who qualifies as an independent contractor. If your franchisees use 1099 labor (delivery drivers, cleaners, freelance marketers), they could be forced to reclassify them as employees.
Franchisor Concerns:
- Potential co-employment risks if franchisors provide staffing support or tools.
- Increased labor costs and compliance burdens for franchisees.
Action Step: Provide HR support (be careful here to avoid issues with providing such support) and clear operational guardrails to help franchisees stay compliant. Now might also be a good time to review your operations manual and staffing recommendations.
Revisions to Business Expense Deductions: More Tax Planning, Less Wiggle Room
The bill locks in or expands caps on certain deductions while sunsetting others. This includes continuing limitations on business interest deductions and setting floors for charitable deductions. For companies used to creative tax planning, it narrows some of that space.
Here are a few key deduction-related items and how the bill impacts them:
Meal Expenses: The bill continues to limit the deduction for business meal expenses to 50% of the cost. For example, if a business spends $10,000 on client meals, only $5,000 can be deducted.
Business Interest Deductions: The bill maintains the limitation on deducting business interest expenses to 30% of a taxpayer’s adjusted taxable income (ATI). For example, if a business has an ATI of $100,000, it can deduct up to $30,000 in business interest expenses. Any interest expense above this limit must be carried forward to future tax years. This limitation can significantly affect highly leveraged businesses, especially in years with lower earnings.
Charitable Contributions: The bill introduces a 1% floor for corporate charitable deductions. This means corporations must contribute at least 1% of their taxable income to qualify for a deduction. The existing 10% cap remains unchanged. For instance, a corporation with a taxable income of $2,000,000 must donate at least $20,000 to be eligible for any charitable deduction. This change may discourage smaller charitable contributions and impact corporate philanthropy strategies.
Action Step: Several franchisors have a charitable mission. I work with one franchisors who has their franchisees contribute to 1% for the Planet. If this is something your system does, know the change in charitable contributions is something your franchisees will want a heads up on.
The interest expense limits may be a significant item for small businesses. I have several clients whose franchisee’s profitability can swing from year to year while interest expense remains the same. For S-Corps, there may be some flexibility by adjusting owner compensation levels (a conversation tax accountants love to have!).
If franchisees anticipate that their business interest expense will exceed the 30% limit of Adjusted Taxable Income (ATI) (which can be common in the first 1-2 years of operations), it’s important to consider strategies to mitigate the impact. Another approach is to refinance high-interest debt into lower-interest loans or shift toward equity financing, which avoids non-deductible interest and may improve franchisees bottom line.
Digital Transaction Rules Rewritten: What Happens to Your 1099-Ks?
Small businesses love 1099s, right?!? The new legislation repeals the $600 reporting threshold for third-party networks like Venmo, PayPal, and Square. While that sounds like a reprieve, it’s not a return to the Wild West. Expect a revised threshold somewhere between $600 and $20,000—and more sophisticated tracking.
This doesn’t mean you can stop keeping clean records. As CNBC explains, “Even without IRS mandates, digital platforms are developing their own reporting systems to comply with state and corporate data requests.”
Strategic Response: Several franchisees I work with are starting to pay contractors through platforms like Venmo or PayPal. This approach can reduce the franchisees’ year-end burden of issuing Form 1099s.
For example, one landscaping franchise I advise primarily operates under a contractor model. The franchisees don’t employ workers directly—they classify them as independent contractors. By paying these contractors via PayPal or Venmo, the responsibility of issuing 1099s shifts to the payment platform.
For businesses that typically send out 30–50 1099s each year, this can result in significant time savings and administrative relief.
Opportunity Zones: A Hidden Advantage in Franchise Site Selection
Opportunity Zones are making a comeback—and this time, they may become a powerful tool in your franchise expansion strategy. These areas are designated low-income census tracts that offer substantial tax incentives to investors who deploy capital into these areas. Key benefits include deferring current capital gains taxes and potentially eliminating taxes on new gains if the investment is held long enough.
Why It Matters for Franchisors
The proposed updates in H.R. 1 aim to extend deadlines and enhance the benefits for capital gains invested in Opportunity Zones. For franchisors, this creates a unique opportunity to align location strategy with tax-advantaged growth.
Your real estate development team can deliver an early win for new franchisees.By helping them identify sites within Opportunity Zones. Doing so could position your brand as both financially savvy and socially responsible—while offering franchisees access to significant first-year tax credits.
Strategic Action for Franchisors
Highlight these tax benefits in your franchise sales materials to increase deal flow and differentiate your brand. Evaluate your development pipeline for overlap with current Opportunity Zones. Empower your real estate team with tools or partnerships that help identify qualifying locations.
Frequently Asked Questions about Franchisor Tax Planning Under H.R. 1
1. What conversations should our franchise sales team be having with candidates right now?
Your development reps shouldn’t give tax advice, but they should be framing unit economics around tax-aware thinking. For example, mentioning how Opportunity Zones, bonus depreciation, or QBI changes might improve early cash flow can position your system as forward-thinking and franchisee-first.
Script Example:
“While we don’t give tax advice, there are some upcoming legislative changes that could improve first-year cash flow for new business owners. We recommend asking your CPA about them during due diligence.”
3. Could H.R. 1 change how we approach multi-unit or area development deals?
Yes. Enhanced upfront deductions and potential QBI expansions could make multi-unit deals more attractive by increasing near-term tax shields. On the flip side, increased scrutiny on labor classification and interest deductibility may create risk if the unit ramp-up is slow or debt-heavy.
Strategic Angle: Use these discussions to model different ramp-up schedules and help prospects think through the operational realities of scaling responsibly under a new tax regime.
4. Will H.R. 1 affect how we work with third-party vendors like outsourced accounting or HR firms?
Possibly. Stricter definitions of co-employment and contractor classifications may require your vendors to rework how they service franchise systems. If your vendors touch franchisee labor, benefits, or payroll processes, ask them how they’re planning for regulatory changes—and whether they’ll indemnify your brand if issues arise.
5. How do I avoid accidentally crossing the line into giving tax advice to franchisees?
Stick to “what to ask” instead of “what to do.” Equip franchisees with conversation starters, not conclusions. For example:
- ✅ “Ask your CPA how the QBI changes might affect your 2025 estimated payments.”
- 🚫 “You’ll save 3% on taxes next year under this bill.”
You’re coaching smarter behavior, not offering compliance advice. You can even provide a checklist of tax topics to raise during year-end planning.
6. What’s the risk of inaction for franchisors?
The biggest risk is appearing reactive rather than proactive. Even if the bill evolves, franchisors who demonstrate financial literacy and support will strengthen franchisee trust and improve system-wide financial outcomes. Those who wait may face confusion, misaligned expectations, or even Item 19 challenges if unit performance swings due to tax impacts.
Final Thoughts: Get Ahead of This Now
Even if the bill doesn’t pass in its current form, major portions are likely to resurface in future legislation. Franchisors who prepare now will gain a strategic edge—especially when it comes to communicating financial risks and opportunities to franchisees.
While most franchisors are understandably cautious about offering anything that resembles tax advice, there’s a smart middle ground: educating without advising. By equipping your franchisees with the right information and tools, you empower them to have more productive conversations with their tax advisors. It’s a simple, low-risk way to score a meaningful coaching win.
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