Question

Gold company signs a 13-year franchise agreement with silver. silver retained significant powers, rights, and a continuing interest. gold company (the franchisee) makes noncontingent payments of $18,000 per year for the first four years of the franchise. gold company also pays a contingent fee of 2% of gross sales every month. which of the following statements is correct?

a. gold company may deduct the $18,000 per year noncontingent payments in full as they are made.
b. gold company may deduct the monthly contingent fee as it is paid.
c. gold company may deduct both the noncontingent annual fee and the contingent monthly fees as they are paid.
d. gold company may not deduct either the noncontingent annual fee or the contingent monthly fees as they are paid.
e. none of the above

Answer 1

Gold Company can deduct the $18,000 yearly noncontingent payments and the 2% monthly contingent fees on gross sales as they are ordinary, necessary, and directly related to the franchise operations, making option C the correct choice.

Step-by-step explanation:

The correct answer to whether Gold Company may deduct the payments made to Silver under the franchise agreement is option C. Gold Company may deduct both the noncontingent annual fee and the contingent monthly fees as they are paid. In accounting and tax practices, regular business expenses that are ordinary and necessary, such as noncontingent payments and contingent fees based on sales, are generally deductible in the period they are incurred if they are related to the franchise operations.

For the noncontingent payments of $18,000 per year, these are fixed expenses under the franchise agreement and are typically considered deductible business expenses. Similarly, the contingent fee of 2% of sales represents variable costs that directly relate to the franchise's sales and operations and are also normally deductible in the period they are paid.