CapEx vs. OpEx for a Food Franchise: What the Tax Code Says

Capital costs are recovered over time, spread across several years as depreciation or amortization, while operating costs are deducted in the year you incur them. Which bucket a given buildout item lands in changes your first-year cash position more than most first-time franchise buyers expect, and one rule in particular catches almost everyone off guard: your initial franchise fee does not amortize on your franchise agreement’s own term.

This is a general explanation of how federal tax law classifies franchise-related costs. It is not tax advice for your specific return, and we are not a CPA firm or a tax preparer. Nothing here tells you how to structure a purchase to reduce what you owe, and nothing here recommends a particular election. The goal is to name the Internal Revenue Code sections and IRS guidance involved, so a conversation with an accountant before you sign anything starts from an accurate baseline instead of a stale one.

The headline finding: your franchise fee doesn’t follow your agreement’s term

This is the item worth reading twice, because it is also the item buyers most often get wrong.

Federal tax law classifies your initial franchise fee as a Section 197 intangible. 26 U.S.C. 197(d)(1)(F) lists “any franchise, trademark, or trade name” among the categories of Section 197 intangibles, and 197(a) requires that these be amortized ratably, straight line, over 15 years (180 months), beginning with the month you acquire them. That 15-year period is fixed by statute. It has nothing to do with the length of the actual contract you signed with your franchisor.

That mismatch is the finding this page exists to explain. If you sign a ten-year franchise agreement, the up-front franchise fee you paid to get in still spreads across fifteen years for tax purposes, five years past the point your original agreement might already be up for renewal. It doesn’t matter whether your agreement’s initial term is five years, ten years, or twenty. The 15-year amortization clock runs the same regardless. The IRS’s own general guidance on intangibles confirms the same 15-year rule for Section 197 property, though the franchise-specific application traces to the statute itself. Our FDD Item 5 walkthrough covers what the initial fee itself typically includes and how it’s disclosed before you ever get to the tax treatment of it.

The base distinction: a repair you deduct now, or an improvement you capitalize later

Two Internal Revenue Code sections set the baseline for almost everything else on this page. IRC 162 allows a deduction for the ordinary and necessary expenses you incur during the year in carrying on your business, including certain materials, supplies, repairs, and maintenance. IRC 263(a) requires you to capitalize the costs of acquiring, producing, and improving tangible property, regardless of the size or the amount of the cost.

Whether a given cost falls under 162 or 263(a) generally comes down to a three-part improvement test set out in the IRS’s tangible property regulations, in place since 2014 and unchanged by recent legislation: does the cost result in a betterment to the property, a restoration of it, or an adaptation of it to a new or different use? If none of those three apply, the amount is generally a currently deductible repair. If one does, it generally has to be capitalized and recovered over time instead.

Section 179: what you can expense immediately, and why the number changes every year

Section 179 of the tax code lets a business elect to expense the cost of qualifying property immediately, in the year it’s placed in service, instead of depreciating it over several years. The dollar limits on that election are not fixed. They’re set for each tax year, and per IRS Publication 946, they moved as follows:

For tax year 2025, the maximum Section 179 deduction is $2,500,000, with the phase-out beginning once $4,000,000 of qualifying property has been placed in service.

For tax year 2026, the maximum Section 179 deduction rises to $2,560,000, with the phase-out beginning at $4,090,000.

Qualifying property under Section 179, per Publication 946, includes tangible personal property, off-the-shelf software, qualified Section 179 real property, and qualified improvement property, the category covered in more detail below. These 2025 and 2026 figures reflect a substantial increase Congress enacted in 2025 legislation. If you find an older source quoting a noticeably smaller limit for 2025 or later, that source is describing the law as it stood before that 2025 change, not the current rule. Confirm any Section 179 figure against the specific tax year it’s supposed to apply to before you rely on it.

Bonus depreciation: 100% is now permanent, and the phase-down you may have read about no longer applies

This is the second place a stale figure is likely to trip you up, and it’s worth being direct about it.

100% first-year bonus depreciation is now permanent for qualified property acquired after January 19, 2025, per IRS Notice 2026-11, announced by the Treasury Department and the IRS on January 14, 2026. A taxpayer may instead elect a reduced rate, generally 40%, or 60% for certain longer-production-period property, for qualified property placed in service during the first tax year ending after January 19, 2025, but that reduced rate is an optional election, not the default outcome.

Here’s why this needs saying out loud rather than just stated as a fact and left there: prior law phased bonus depreciation down on a fixed schedule, to 40% in 2025 and 20% in 2026, reaching zero in 2027. If you read an article, a franchise sales deck, a lender’s own materials, or general tax commentary describing that phase-down as current law, you are reading something that was superseded for any qualified property acquired after January 19, 2025. That is not a rounding difference or a matter of interpretation. A source claiming bonus depreciation is 40% for 2025 and a source stating it’s permanently 100% for property acquired after January 19, 2025 cannot both be describing current law, and the second one is correct. You will find the stale version circulating widely, because most of the internet’s tax commentary was written before this guidance existed. Check the date on anything you read about bonus depreciation, and weigh guidance from January 2026 or later more heavily than anything written earlier.

Qualified improvement property: your interior buildout, and the 15-year fix

Most of what a food franchise buildout actually consists of, the interior work that turns a leased shell into a working kitchen and dining room, falls into a specific tax category called qualified improvement property, or QIP. QIP is an improvement to the interior of a nonresidential building, made after the building was first placed in service. It excludes enlargements of the building, elevators and escalators, and the building’s internal structural framework.

QIP recovers over 15 years under the standard MACRS depreciation system (20 years under the alternative system), and that same 15-year period is also the reason QIP qualifies for bonus depreciation. That 15-year treatment wasn’t always settled law. A drafting error in the Tax Cuts and Jobs Act, sometimes called the retail glitch, left QIP without any defined recovery period at all for a period of time. The CARES Act, passed in 2020, fixed the error retroactively, restoring the 15-year period for QIP placed in service after December 31, 2017. IRS Publication 946 confirms QIP’s eligibility for Section 179 treatment as well.

The smallwares safe harbor: when you can just deduct it

Not everything in a buildout needs to be capitalized and recovered over years. A de minimis safe harbor under Treasury Regulation 1.263(a)-1(f) generally lets a business currently deduct, rather than capitalize, amounts up to $2,500 per invoice or per item if the business doesn’t have an applicable financial statement, or up to $5,000 per invoice or per item if it does, thresholds that have applied unchanged since tax years beginning on or after January 1, 2016. That threshold was set by IRS Notice 2015-82, effective for tax years beginning on or after January 1, 2016, and it hasn’t changed since.

For a food franchise, this is generally where smallwares land: the pans, utensils, small fixtures, and low-cost items that don’t rise to the level of a capital equipment purchase but still add up across an entire kitchen buildout.

Where a typical franchise buildout item lands

Item	Tax treatment
Equipment (ovens, fryers, walk-in coolers, POS hardware)	Capital, tangible personal property. Normally recovered over 5 or 7 years under MACRS, though a Section 179 election, or 100% bonus depreciation for qualified property acquired after January 19, 2025, can recover the full cost in the first year it’s placed in service. The election changes the timing of the deduction, not the equipment’s underlying character as capital property.
Leasehold and interior buildout	Generally qualified improvement property: capital, 15-year recovery, bonus-depreciation eligible.
Smallwares under the safe-harbor threshold	Currently deductible under the de minimis safe harbor rather than capitalized.
Rent	An ordinary and necessary business expense under IRC 162, deductible as paid or incurred.
Initial franchise fee	A Section 197 intangible, amortized straight line over 15 years, regardless of your agreement’s actual term.

Why this is a cash-timing question, not a tax-strategy question

Two franchise buyers can spend the exact same total dollar amount on an opening buildout and end up with meaningfully different first-year deductions, purely because of how each cost gets classified and which elections are available and chosen. That isn’t a loophole, and it isn’t a claim about what you personally should deduct. It’s simply how the mechanics work once real dollars get sorted into the IRC 162, IRC 263(a), Section 179, bonus-depreciation, and Section 197 buckets described above.

The useful time to work through that sorting with an accountant is before you sign your franchise agreement and finalize your buildout budget, when the classification of each planned cost still has some flexibility attached to it, not after the fact at filing time, once most of those choices have already been locked in by how the money was actually spent. If you’re still working out the total cash you’ll need to get open or how SBA financing fits into that plan, bring your accountant into the conversation at the same stage, not after the loan closes. Our FDD Item 7 walkthrough breaks down the categories that make up your initial investment estimate, and a tax document organizer built for a small business is a reasonable place to start keeping the invoices and closing documents your CPA will eventually want to see, sorted by which of these buckets they’re likely to land in.

None of this replaces a CPA who can look at your specific numbers, your entity structure, and the rules in force for the actual year you file.