Franchise Agreement: 20 Important Things to Know

Franchise Agreement: 20 Important Things to Know

by | Dec 9, 2023 | Blog

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A franchise agreement is a legally-binding contract between the parties to a franchise relationship. In order to take ownership of a franchise as the franchisee, you sign a franchise agreement.

A franchise agreement protects both sides. It protects you as the franchisee and also protects the franchisor brand. When buying a franchise you will be making a large financial investment. A signed agreement gives you rights to help safeguard your investment in your business.

What is a Franchise Agreement?

franchise agreement

 

A franchise agreement is the master legal document that sets forth the rights and obligations of the two main parties to a franchise: franchisor and franchisee.

In legal terms a franchise agreement is a license from the franchisor to the franchisee. A license simply means one party gives permission to another party to do something or use something of value. In the case of franchising agreements, this means:

  • The franchisor licenses to the franchisee the right to use the franchisor’s intellectual property, systems and brand.
  • The franchisee acquires the rights to open a business using the franchisor’s intellectual property, systems and brand, provided it meets certain conditions.

Although the definition of franchise agreement is simple enough, the documentation can be complex.

A typical franchise agreement is 25 to 30 pages long. After attaching all exhibits and addenda, the final agreement can be two or three times as long.

Key Franchise Agreement Points

Here are 20 things you must know about franchise agreements.

1. Disclosure

In the United States a franchise business falls under the Federal Trade Commission’s FTC Franchise Rule. This is a set of Federal regulations governing most franchises (with a few exemptions).

The FTC Rule imposes strict disclosure requirements on franchisors in the form of a Franchise Disclosure Document (FDD) that must be delivered to a prospective franchisee.

One of the required pieces of information in the Disclosure is a copy of the Franchise Agreement. The copy must be attached to the FDD and delivered a minimum of 14 days before entering into a binding contract. This gives you time to review and discuss the agreement with an attorney.

Beyond basic disclosure requirements, the Franchise Disclosure Document often contains detailed provisions regarding the franchisor’s background, financial performance representations, and the legal and financial obligations of the franchisee.

This includes insights into the franchisor’s litigation history, bankruptcy records, and initial investment estimates, providing comprehensive information for an informed decision.

2. Trademark and Intellectual Property

A franchise agreement grants to the franchisee the right to use the franchisor name, trademarks, service marks, logos, slogans, designs, and other branding indicia. The franchisor will also grant the right to use other intellectual property such as the operating manual and proprietary software systems.

This contractual license is the foundation of the agreement. Without it, a franchisee would not be able to use intellectual property without infringing.

The agreement also outlines the protection and limitations concerning these intellectual properties. As a franchisee, you must adhere to specific guidelines on how to use these properties to maintain brand consistency and legal compliance.

This section also usually explains the franchisor’s responsibility to defend its intellectual property against third-party claims.

3. Support and Training

The agreement will set forth the franchisor’s obligation to provide training and support services. This obligation is both prior to opening and during entire term of the franchise agreement.

This section often includes provisions for ongoing development and training programs to keep franchisees updated on new technologies, marketing strategies, and operational improvements. It may also outline the support provided in areas like marketing, technology, and operational consulting.

4. Advertising

franchise agreement

The agreement should set forth the franchisor’s obligation to support franchisees with marketing and advertising. Unfortunately, some agreements impose more requirements on franchisees than on franchisors. In some franchises the franchisee is required to spend a certain percentage for local advertising, but the franchisor is remarkably free of hard and fast obligations!

To ensure transparency and fairness, franchise agreements may include the following provisions related to marketing and advertising support:

  • Clear description of the franchisor’s marketing support and resources provided to franchisees.
  • Specification of the franchisor’s financial contributions to national or regional advertising campaigns.
  • Explanation of any required local advertising contributions from franchisees, with a fixed or percentage-based amount.
  • Details on the approval process for franchisee-created advertising materials and campaigns.
  • Information on cooperative advertising programs and the franchisee’s eligibility to participate.
  • Clauses outlining the use of the franchisor’s trademarks and branding in marketing efforts.
  • Provisions for tracking advertising effectiveness and measuring return on investment.
  • Requirements for reporting advertising expenditures and campaign results to the franchisor.
  • Clarity on any restrictions or guidelines for online marketing and social media usage.
  • Language addressing the resolution of advertising disputes between the franchisor and franchisees.

5. Long Term Duration

The franchise agreement will set forth the duration of the contract. Franchise agreements are long term. A typical term is 10 years. Some are 20 years.

A long term agreement protects you as the franchisee as well as the franchisor. Franchise opportunities can be expensive, and you will want to protect your investment.

Also included will be conditions for renewing. Often an initial 10-year term can be automatically renewed for a second 10-year term, unless either side gives notice of non-renewal.

The long duration also means that the franchisee must adapt to any changes in the franchisor’s system over time. This might include adopting new branding, technology upgrades, or operational changes. The agreement may contain clauses on how these changes are to be implemented and financed.

6. Signed and in Writing

Every franchise agreement should be in writing signed by both parties. Strangely enough, oral or handshake agreements in franchising exist — although they are rare. And it’s no surprise why they rarely occur.

Think of the legal nightmare trying to prove oral representations years later. A written document makes rights and obligations clear.

A written franchise agreement serves as a clear record of the terms agreed upon, which can be crucial in dispute resolution. It usually contains clauses outlining the process for handling disagreements, including mediation and arbitration procedures.

7. Territory

The agreement will outline whether the franchisee gets a protected or exclusive territory.

Territories are important to limit market saturation. An individual franchise business will have a harder time competing in a over-saturated area. Remember your significant investment in the opportunity. How would you like it if you paid hundreds of thousands of dollars to open a franchised outlet, only to discover that the franchisor allowed another franchise just a quarter mile away?

Subway is an example where much has been written about market over-saturation and its negative effects on franchisees.

The agreement might also address how territory rights are affected by changing market dynamics, such as the introduction of online sales channels or mobile services. This section ensures that the franchisee’s interests are protected as the business model evolves.

8. Fees and Expenses

franchise agreement

 

The franchise agreement outlines the costs of franchising ownership. All franchises charge fees. These include the initial franchise fee, as well as ongoing fees such as the monthly royalty fee, advertising or marketing fee, and any other fee.

Agreements can include late fees and interest. Franchisees who fall behind could find it that much harder to catch up once late fees and interest start piling up.

The contract should also cover any required expenses and who is responsible to pay them. For example, the franchisee may be responsible for paying for training, and for the travel expenses of employees to attend training.

The agreement may include provisions for adjustments in fees based on various factors like inflation, performance metrics, or changes in market conditions. Understanding these variables is crucial for financial planning and long-term sustainability of the franchise.

9. Site Selection

Each franchisee selects its own site. However, the franchisor typically has the right to approve the location.

You must follow the franchisor’s standards for developing the premises, including choice of furniture, fixtures, upholstery, landscaping and signage that meet the franchisor’s standards.

Some franchisors require the franchisee to use approved vendors and service providers. The franchisor will inspect the build-out for adherence to the franchise system standards.

The agreement might also cover terms under which a franchisee can relocate or expand their operations. This includes processes for franchisor approval, adherence to new location standards, and potential impact on existing franchisees in nearby territories.

10. Termination

The agreement outlines any conditions for terminating early. Usually the franchisor will have the greatest termination rights. In fact, franchisees often have no contractual rights to terminate early.

Cause for termination generally includes failing to pay a franchise fee, filing bankruptcy or failing to make needed repairs to premises.

The franchise agreement will also specify the conditions, if any, under which you can “cure” a default. For example, you may be entitled to written notice and 14 days to remedy certain defaults.

The agreement typically outlines post-termination obligations, such as the de-identification of the business from the franchise brand, return or destruction of confidential information, and non-compete clauses to prevent the former franchisee from opening a similar business within a specified period.

11. Obligations upon Termination

What happens when the franchise agreement expires or terminates early? The document will state what the parties must do to unwind the business relationship. Usually this consists of a long list of specific obligations for the franchisee.

These include the obligation to stop using the brand name, take down signs, return the operations manual, and pay all amounts due.

Some franchise agreements may also detail any support or assistance the franchisor will provide post-termination. This could include guidance on business wind-down procedures, assistance with asset liquidation, or support in notifying customers about the closure or change in management.

12. Non-Competes

Franchise agreements often contain restrictive covenants limiting what franchisees can do. For example, you or an affiliated company may not be permitted to operate a competing business during the agreement term.

Agreements also typically contain non-competes that kick in after termination. For example, a provision could prohibit operating a competing business within 5 miles of your former location, for a period of three years following termination.

The scope of non-compete clauses, including geographic and temporal limitations, should be carefully reviewed. These clauses can significantly impact your ability to engage in similar business ventures post-termination. Ensure that the restrictions are reasonable and enforceable in your jurisdiction.

13. Arbitration

franchise agreement

Franchise agreements usually contain an arbitration clause requiring any dispute to go to arbitration. Instead of filing a lawsuit you might have to go before a body such as the American Arbitration Association.

The franchisor sometimes retains the right to file a lawsuit to obtain an injunction under certain conditions (such as to prevent the franchisee from revealing confidential information about the franchise system).

The agreement will specify the jurisdiction for filing any lawsuit. The choice of jurisdiction will be favorable to the franchisor.

It’s important to understand the arbitration process, including who will bear the costs. Arbitration can be less expensive than court litigation, but it may still involve significant legal fees. The agreement should clarify how arbitration costs and awards are handled.

14. Insurance and Indemnification

The franchise agreement will include the requirement for the franchisee to maintain certain insurance coverage throughout the term of the franchise.

Expect indemnification clauses, as well. For example, the franchisee will probably be required to “indemnify, defend and hold harmless” the franchisor against any claims, costs, damages and expenses arising out of the franchisee’s activities.

The agreement might specify types of insurance coverage required, such as liability, property, and workers’ compensation insurance. It’s crucial to comprehend these requirements and ensure that your insurance policies meet the franchisor’s standards.

15. Records and Audits

As the franchisee you will be required to maintain accurate records and provide regular financial and operations reports. Since royalty payments are often a percentage of gross sales, reporting accurate sales numbers is especially important.

The franchisor usually has the right to request additional information including tax returns and to audit your records. You could be charged an audit fee, also.

Maintaining accurate records isn’t just for royalty calculations; it’s also a matter of compliance with the franchisor’s operational standards. Regular audits by the franchisor ensure that franchisees adhere to the prescribed business practices, contributing to the overall brand reputation.

16. Physical Premises and Renovations

If the business is a restaurant or retail premises where consumers visit, franchisees will have substantial obligations to maintain the premises in good repair at their sole expense. The franchisor usually reserves the right to inspect the premises to make sure they are well maintained.

You may be required to renovate once every 5 to 10 years (or sooner if needed). Renovation might involve considerable expense, including replacing upholstery, furniture or fixtures to meet the franchisor’s standards.

Your ability to be creative could be severely curtailed. For example, you might not be able to even choose different paint colors without the franchisor’s approval.

In addition to meeting franchisor standards, renovations and maintenance must also comply with local building codes and regulations. This includes obtaining necessary permits and ensuring that any structural changes are legally compliant.

17. Transfer and Re-Sale

Franchise agreements will outline any rights to transfer the franchisee’s ownership interest in the franchise relationship to a buyer. Sometimes franchisors retain the right of first refusal, meaning they get the first chance to buy your business if you decide to sell.

Also, franchisors typically reserve the right to approve buyers. The franchisor may impose many requirements on a buyer, including the need to submit an application and pay the initial fee.

In practice, transfer rights are tricky and will require adept structuring if you go to sell. You will need to guard against the buyer backing out or going around you directly to the franchisor.

The agreement may address succession planning, outlining the process for transferring the franchise in the event of the franchisee’s retirement, incapacity, or death. This ensures business continuity and protects the franchisee’s investment.

18. No Industry Standard Agreement

There is no such thing as a standard franchise agreement for the entire industry. Every franchise brand creates its own contract documentation. Most agreements contain common types of provisions, but they won’t be worded exactly the same.

Each franchise may have unique clauses addressing specific business models or industry challenges. It’s vital to understand these unique elements and how they impact your operation within the specific franchise system.

19. Negotiating

franchise agreement

Prospective franchisees often want to know if they can negotiate the franchising agreement. Technically the answer is yes. You should always try to negotiate. However, be prepared for the franchisor to refuse. The nature of a franchise system is such that the franchisor tries to keep all requirements uniform.

A franchise agreement is a contract of adhesion, meaning it’s created by one party with greater bargaining power using standard form provisions. However, sometimes it’s possible for franchisees to negotiate minor points such as an installment schedule for the initial franchise fee.

The more popular the franchise, the less likely you can successfully negotiate. A well-established franchisor has little incentive to make one-off concessions. However, if you are one of the first in a new franchise, you might have more negotiating leverage.

Sometimes, a franchisor’s willingness to negotiate can be influenced by legal precedents or standard industry practices. An experienced franchise attorney can offer insights into what terms might be more flexible based on industry norms and legal standards.

20. Review with a Lawyer

Regardless of whether you are able to negotiate terms, it’s still important for you to get a franchise lawyer to review the franchise agreement and the FDD.

An experienced franchise lawyer can explain important provisions of the franchise agreement. A franchise lawyer may also be able to point out unusually harsh or one-sided provisions that are not common in the industry.

Besides understanding the franchise agreement, a lawyer can help ensure that your franchise operation complies with local, state, and federal laws. They can also assist in conducting due diligence on the franchisor, including reviewing their financial health and business track record.

An experienced attorney will understand what to look for in the Franchise Disclosure Document, and can identify red flags. Also, the attorney may know of common law and state laws that protect franchisees. Knowing key points before signing could save you from making a big mistake.

Read more: The Importance of Hiring a Franchise Attorney.

Franchise Agreement Summary

Key Points in Franchise Agreement Description
1. Disclosure Franchise falls under FTC’s Franchise Rule, requiring a Franchise Disclosure Document (FDD).
2. Trademark and Intellectual Property Franchisee granted rights to use franchisor’s name, trademarks, and intellectual property.
3. Support and Training Franchisor’s obligation to provide training and support services, both before and during the term.
4. Advertising Franchisor’s obligation to support franchisees with marketing and advertising.
5. Long Term Duration Franchise agreement’s duration, typically 10 to 20 years, with conditions for renewal.
6. Signed and in Writing Every franchise agreement should be in writing and signed by both parties.
7. Territory Outline of protected or exclusive territory granted to the franchisee.
8. Fees and Expenses Costs of franchising ownership, including initial and ongoing fees and expenses.
9. Site Selection Franchisee’s right to select a location, subject to franchisor’s approval and standards.
10. Termination Conditions and rights for early termination, usually favoring the franchisor.
11. Obligations upon Termination Requirements to unwind the business relationship after termination or expiration.
12. Non-Competes Restrictive covenants limiting franchisee’s competing activities during and after the term.
13. Arbitration Dispute resolution through arbitration, often with franchisor’s jurisdiction preference.
14. Insurance and Indemnification Franchisee’s obligation to maintain insurance coverage and indemnify the franchisor.
15. Records and Audits Requirements to maintain accurate records and provide regular reports and audits.
16. Physical Premises and Renovations Franchisee’s responsibility to maintain and renovate premises according to franchisor’s standards.
17. Transfer and Re-Sale Outline of rights to transfer franchise ownership and franchisor’s approval process for buyers.
18. No Industry Standard Agreement Franchise agreements vary between brands and may contain unique provisions.
19. Negotiating Prospects can attempt to negotiate minor points, but franchisors often maintain uniform requirements.
20. Review with a Lawyer Regardless of negotiation, consulting a franchise lawyer to review the agreement and FDD is crucial.

Conclusion

The franchise agreement is a document with the rights and obligations of the parties outlined. The franchise relationship is not employer-employee. As the franchisee you operate a separate business in accordance with the franchise system. You are an independent business owner and the franchise agreement reflects this separation of interests.

Image: DepositPhotos



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Where to Get Free Money to Start a Small Business in 2024

Where to Get Free Money to Start a Small Business in 2024

by | Dec 9, 2023 | Blog

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If you buy something through our links, we may earn money from our affiliate partners. Learn more.

Small business owners don’t always have access to enough resources to meet their goals. Luckily, there are many business grants and other funding programs available to help. Here’s a guide to several ways to fund projects for your small business.

How Do You Get Free Money to Start a Business?

Free money to start a business usually comes in the form of grants. These can come in many forms, from federal small business grants to those offered by local nonprofits. The process usually includes an application where you outline your need and how you’d use the funds.

Application Tips for Success

Securing a grant for your small business can be a competitive process. To enhance your chances of success, consider these application tips:

  • Understand the Grant’s Objectives: Read the grant application guidelines thoroughly to understand what the grantor is looking for. Tailor your application to align with their objectives and criteria.
  • Prepare a Solid Business Plan: Many grants require a detailed business plan. Ensure your plan is clear, concise, and demonstrates the potential for growth and sustainability.
  • Highlight Your Unique Selling Point: Clearly articulate what makes your business stand out. Whether it’s a unique product, innovative service, or community impact, make sure it shines in your application.
  • Provide Clear Budget Plans: Be precise about how you will use the grant money. A well-thought-out budget shows that you are serious and have a plan for success.
  • Proofread and Review: Errors can detract from the professionalism of your application. Proofread for spelling and grammatical mistakes and consider having a third party review your application before submission.
  • Meet All Deadlines: Ensure you understand all the deadlines and submit your application on time. Late submissions are usually not considered.
  • Gather Support Documents: Collect all necessary supporting documents in advance. This can include financial statements, legal documents, and letters of support or recommendation.
  • Stay True to Your Story: Authenticity matters. Be honest and passionate about your business and its goals. Authenticity often resonates well with grant committees.
  • Follow Up: After submitting your application, it’s appropriate to follow up to confirm receipt and express your continued interest and enthusiasm for the grant opportunity.

Top Places to Get Free Money to Start a Small Business

Small businesses can receive grant money from several sources. The exact opportunities you apply for may depend on your location, industry, and other factors. However, there are several federal grants, nonprofit opportunities, and state programs that may appeal widely to small businesses. Here are several common ones.

 

 

Small Business Administration Grants (SBA)

The Small Business Administration is the main source of grant money through the federal government. Here are some specific programs run through the administration to provide free money to start or run a business.

  • State Trade Expansion Program: The SBA’s STEP program awards money to state and territory governments to help businesses establish and improve their exporting programs. Businesses can apply for these grants through their state, but the initial funding comes from the SBA.
  • Small Business Innovation Research: The SBIR program awards federal funding to firms that undertake scientific research projects.
  • Small Business Technology Transfer: The STTR program also provides funding for innovative small businesses with commercialization potential.
  • Management and Technical Assistance: The SBA’s 7(j) Management and Technical Assistance Program supports eligible small businesses in select regions that want to provide management and technical assistance to other small firms.
  • Grants for Community Organizations: The SBA also provides grants to community organizations across the country. Funds don’t go directly to small businesses, but recipients may offer grants or provide other forms of assistance.

General Small Business Grant Money

There are also small business grant programs offered by large corporations or other major groups across the country. Not every small business may qualify for these. But they should appeal to a wide audience.

  • NASE Growth Grants: The National Association for the Self-Employed offers grants of up to $4,000 to member businesses. The program has been around since 2006 and has awarded nearly $1 million in grant funds.
  • Comcast RISE Grants: Comcast RISE is a two-year program providing grants to underserved businesses across the U.S. Each funding round focuses on a select group of cities.
  • NAV’s Small Business Grant: Financial services provider NAV offers an ongoing program to support small businesses. The program is currently being reimagined but is expected to open again in 2023.
  • Grants.gov: Grants.gov is the portal the federal government uses to provide grant opportunities. This isn’t a specific grant, but you can use the portal to find relevant opportunities.
  • Hello Alice: Hello Alice is a funding platform that hosts various grant opportunities throughout the year. Corporations and nonprofits often partner with Hello Alice to offer short-term funding programs.

Where to Get Free Money to Start a Small Business

 

Industry-specific Grant Money

Some grant programs, both through private companies and the government, aim to support small businesses in a specific industry. Here are a few that may help certain types of businesses.

  • USDA Rural Development Business Grants: The USDA offers grants for businesses that benefit rural communities. These often include agriculture operations, but may apply to other industries as well.
  • National Institutes of Health Grants: NIH grants go toward biomedical companies that undertake research projects that may benefit the public.
  • Restaurant Strong Fund: The Restaurant Strong Fund provides various grant opportunities throughout the year, often with corporate partners.
  • Halstead Jewelry Grants: The Halstead Grant is an annual contest for silver jewelry designers. Businesses can win up to $7,500 plus other benefits.

Small Business Grants from State and Local Governments

Some government grants also come from state and local governments. You’ll have to search for specific opportunities in your location. But here are a few places to start.

  • Small Business Development Centers: SBDCs are local centers funded through the SBA. They provide local grants, along with technical assistance and other support.
  • State Business Incentives Database: The State Business Incentives Database provides access to updated information about funding programs and similar opportunities in each state.
  • Minority Business Development Agency: For minority-owned businesses, the MBDA provides support and access to grants and other funding options.

Local Community Grants and Resources

Local community grants can be a goldmine for small businesses. These grants often focus on boosting local economies and are less competitive than national grants. Here’s how to tap into these resources:

  • Connect with Local Chambers of Commerce: Your local chamber of commerce can be an invaluable resource for finding community grants. They often have information on local funding opportunities and can assist with the application process.
  • Check with Local Business Development Centers: Small Business Development Centers (SBDCs) and other local business support organizations frequently have lists of local grants and resources available for small businesses.
  • Participate in Local Business Networks: Joining local business associations and networking groups can provide insider knowledge on upcoming grants and valuable contacts.
  • Explore Community Foundations: Many communities have foundations that provide grants to local businesses, especially those contributing positively to the community.
  • Visit Local Government Websites: Municipal and county websites often list available business grants and economic development incentives.
  • Attend Local Business Events: Business expos, workshops, and seminars are great places to learn about local grant opportunities and to network with other business owners and grant providers.
  • Stay Informed Through Local Media: Local newspapers, business journals, and community bulletins often publish information about grant opportunities.

Green Business Grants

If you’re a sustainable business or want to make some energy-efficient improvements, these grant funding sources may help.

  • EPA Grants: The Environmental Protection Agency unveils several grant programs throughout the year to support environmentally friendly businesses and projects.
  • Patagonia Corporate Grant Program: Patagonia supports grassroots organizations and projects that improve the environment through its corporate small business grants.
  • U.S. Department of Energy Grant: The Department of Energy periodically offers grants and incentives for energy-efficient upgrades like lighting or appliance changes.

Where to Get Free Money to Start a Small Business

 

Nonprofit Grant Money

Nonprofit organizations can also benefit from grants. These opportunities can come from federal agencies or private corporations. Here are a few to consider.

  • The Carnegie Corporation: The Carnegie Corporation proactively seeks organizations to award grants to that can help them achieve their program goals. The corporation also offers a cloud-based portal for applicants.
  • Walmart Foundation Grants: The Walmart Foundation offers local community grants to nonprofits that support the areas they serve.
  • Amazon Web Services Imagine Grant: AWS’s Imagine Grant supports community organizations using technology to solve specific problems.
  • Google Ad Grants: Google provides free money for advertising to select nonprofits to help them spread the word about their initiatives online.

Startup Grants for Women-Owned Businesses

Where to Get Free Money to Start a Small Business in 2023

Women-owned businesses have traditionally been less likely to get funding. So many organizations offer small business grants specifically for female founders.

  • Amber Grants for Women: WomensNet runs the Amber Grant program, which offers funding to women-owned businesses every month. To apply, founders simply create a short video explaining their business and what they’d like to achieve with the funds. The organization offers several specific grants. But this application qualifies businesses for all of them at once.
  • InnovateHer Challenge: InnovateHer is a program of the SBA. The contest awards annual grant funds to women entrepreneurs and those who serve women in their communities. Contests are run through local SBA centers.
  • Cartier Women’s Initiative Award: Luxury brand Cartier offers the Women’s Initiative Award to female entrepreneurs who aim to have a strong environmental or social impact. The program has run since 2006 and is open to women-owned and women-run businesses in every country.

Startup Grants for Veteran-Owned Businesses

If you’re a veteran small business owner, you may also access grant opportunities that honor your service.

  • The Second Service Foundation Military Entrepreneur Challenge: Formerly Street Shares Foundation, the Second Service Foundations supports military and veteran entrepreneurs through a number of initiatives. The Military Entrepreneur Challenge is a competitive cash award that involves an online application, an interview, and even a live pitch session.
  • Hivers and Strivers: Hivers and Strivers is an investment fund for early-stage startups owned and run by U.S. military veterans. Many of the programs involve loans and other traditional forms of financing. But the company periodically offers grants as well.
  • Warrior Rising Small Business Grants: Warrior Rising is a charitable organization that supports U.S. military veterans with financing, mentorship, and support. Veteran-owned businesses can apply to be part of the program, which identifies each company’s specific needs and creates customized solutions and processes for each member.

Where to Get Free Money to Start a Small Business in 2023

 

Competitive Small Business Grants

Financial assistance is sometimes available to all businesses that apply. But the following programs offer competitive grant funding opportunities to award the most deserving firms.

  • FedEx Small Business Grant Contest: FedEx has run its annual small business grant contest since 2012, providing more than $1.5 million in cash and prizes. The program is open to entrepreneurs around the country, so it is a popular grant program with lots of competition.
  • Visa Everywhere Initiative: Visa Everywhere is an annual grant contest for startups and fintech companies. The finals for this year’s contest are set to compete in Qatar this November. But applications should reopen again in 2023.
  • U.S. Chamber of Commerce Dream Big Awards: The U.S. Chamber of Commerce is a nationwide organization empowering local chambers and business groups throughout the country. This grant program is open to U.S. small businesses, and local chambers of commerce are encouraged to connect with local members to help them apply.
Funding Source Description
Small Business Administration (SBA) Main source of federal grant money. Offers various programs for starting or running businesses, including exporting support and technical assistance.
NASE Growth Grants Offers grants of up to $4,000 to member businesses.
Comcast RISE Grants Provides grants to underserved businesses across the U.S.
Grants.gov Online portal for finding federal government grant opportunities.
USDA Rural Development Business Grants Supports businesses benefiting rural communities, including agriculture operations.
EPA Grants Unveils grant programs throughout the year to support environmentally friendly businesses and projects.

Are Small Business Development Centers the Same as the Small Business Administration?

Small business development centers are one arm of the U.S. Small Business Administration. The SBA is a federal agency that runs many initiatives to support small businesses. Small business development centers include local agencies spread throughout the country that receive SBA funding to serve local business interests. Services often include funding support, technical assistance, and networking events.

Can You Start a Small Business Without Money?

Yes, it is possible to start a business without money, depending on your industry and goals. One option for funding a new business without money is to seek small business grants using the sources listed above.

Frequently Asked Questions: Free Money to Start a Small Business

How Do You Get Free Money to Start a Business?

Free money to start a business usually comes in the form of grants. These grants can be obtained from various sources, including federal small business grants and those offered by local nonprofits. To apply for grants, you need to outline your need and explain how you plan to use the funds.

What Are the Top Places to Get Free Money to Start a Small Business?

The Small Business Administration (SBA) is a major federal source of grant money, offering programs like State Trade Expansion, Small Business Innovation Research, and Small Business Technology Transfer. Other sources include NASE Growth Grants, Comcast RISE Grants, NAV’s Small Business Grant, and opportunities listed on Grants.gov and Hello Alice.

Are There Industry-specific Grant Money Opportunities?

Yes, some grants are specifically tailored to support businesses in certain industries. Examples include USDA Rural Development Business Grants, National Institutes of Health Grants, Restaurant Strong Fund, and Halstead Jewelry Grants.

Can Small Businesses Receive Grants from State and Local Governments?

Yes, state and local governments may offer grants and incentives to support small businesses. Small Business Development Centers (SBDCs) funded by the SBA often provide local grants. The State Business Incentives Database and Minority Business Development Agency are also resources to explore.

Are There Grants for Green Businesses and Nonprofits?

Yes, there are grant opportunities for green businesses and nonprofits. The Environmental Protection Agency offers grants to support environmentally friendly businesses and projects. Patagonia Corporate Grant Program provides small business grants to grassroots organizations working towards environmental improvements. Additionally, Google Ad Grants and Amazon Web Services Imagine Grant assist nonprofits in spreading awareness about their initiatives online.

Are There Startup Grants for Women-Owned and Veteran-Owned Businesses?

Yes, various organizations offer grants specifically for women-owned and veteran-owned businesses. Examples include Amber Grants for Women, InnovateHer Challenge for women entrepreneurs, and the Cartier Women’s Initiative Award for businesses with strong environmental or social impact. For veterans, programs like The Second Service Foundation Military Entrepreneur Challenge and Warrior Rising Small Business Grants offer support and financing opportunities.

What Are Competitive Small Business Grants?

Competitive grants are awarded based on merit, and they usually involve intense competition. Examples include the FedEx Small Business Grant Contest, Visa Everywhere Initiative for startups and fintech companies, and the U.S. Chamber of Commerce Dream Big Awards for U.S. small businesses.

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How to Make Money on Twitch in 2024

How to Make Money on Twitch in 2024

by | Dec 9, 2023 | Blog

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Are you looking to make some extra money in 2024? If so, you might want to consider Twitch streams. In this article, we’re going to teach you everything you need to know about how to make money on Twitch in 2024.

We’ll cover the different ways that you can monetize your channel, as well as some tips to help you make the most of your streaming career. Let’s get started!

What Is Twitch?

Twitch is a live-streaming video platform focused on video gaming, founded in June 2011. The site primarily focuses on gamers streaming themselves playing video games but also features live streams of other activities such as creative content and music.

Twitch also offers paid subscriptions which allow users to donate money to streamers, and in return receive benefits such as emotes, voice chat badges, and other exclusive features.

 

How Do You Make Money on Twitch?

What you need to understand right away when learning how to make money on Twitch is that you need to appeal to your Twitch audience.

The best way to do this is by streaming content that they are interested in. You can also monetize your channel by using paid subscriptions and donations from viewers.

Building and Engaging with Your Community

The success of a Twitch streamer largely depends on their ability to build and maintain a strong community. Engage with your viewers during streams, respond to comments, and create an inclusive environment.

Utilize polls, Q&A sessions, and interactive games to keep viewers involved. Regularly interact with your community outside of Twitch through social media platforms, Discord servers, or community events.

Building a loyal and engaged community not only boosts your viewership but also increases the potential for subscriptions, donations, and sponsorships.

How to Start Making Money on Twitch

How to Make Money on Twitch

For many Twitch users, the dream when first learning how to make money on Twitch is to one day make a full-time income streaming their favorite games.

While it’s not easy to achieve this goal for most Twitch users, there are a few things you can do to increase your chances of success. Here are a few things you’ll need to start making money on Twitch:

  • The right equipment. Before you can start streaming, you will need the right equipment, which includes a quality webcam and microphone, as well as a fast reliable internet connection.
  • A Twitch account. You will need to create a Twitch account and start streaming on the platform. It’s quick and easy to do!
  • Followers. One of the most important steps you can take is gaining followers on Twitch. The more Twitch users you have following you, the better chance you have of making money.
  • Set up monetization options. Once you have followers, you can set up subscriptions and donations on your Twitch channel. You can also look into sponsorships, affiliate marketing, and product sales.
  • Stay consistent. One of the biggest keys to success on Twitch is consistency. Try to stream regularly and provide entertaining content for your viewers.

Leveraging Analytics and Insights

Utilizing Twitch analytics is crucial for understanding your audience and refining your content strategy. These insights can reveal viewer preferences, peak streaming times, and which content resonates most with your audience.

By analyzing this data, you can optimize your streaming schedule, fine-tune your content to better align with viewer interests, and maximize your earning potential.

Analytics also help in identifying growth trends and areas for improvement, guiding your efforts to become a more successful streamer on Twitch.

Diversifying Content Beyond Gaming

While Twitch started as a gaming-focused platform, it has evolved to include a variety of content categories. Diversifying your content to include non-gaming streams, such as Just Chatting, music performances, art creation, cooking shows, or educational content, can attract a broader audience.

This diversification not only enhances your visibility on the platform but also opens up new avenues for monetization. Viewers with varied interests might find your non-gaming content appealing, leading to increased followers and subscribers.

11 Ways to Make Money on Twitch

There are many ways you can monetize your Twitch channel and begin making money streaming. Here are 11 of the most popular ways Twitch streamers earn money:

1. Become a Twitch Affiliate

With the Twitch affiliate program, Twitch affiliates can earn revenue from certain games, game sales, and Twitch Bits.

Streaming regularly, which is at least seven days with at least three concurrent viewers, and increasing your Twitch affiliate status, opens up the Twitch partner program.

2. Start Your Own Twitch Store

You can start selling your own merchandise and products on Twitch. This could include T-shirts, mugs, or posters related to your stream.

3. Donations

If your Twitch account is so new that you cannot set up subscriptions, then you may consider accepting donations from your viewers.

This can be a great way to start earning money on Twitch until you become successful enough to gain subscribers. You can set up donations using a Steamlabs tip page, or using a PayPal donations button.

How to Make Money on Twitch

4. Offer Twitch Subscriptions

Subscriptions are one of the most popular ways to make money on Twitch. Offering subscriptions gives paying subscribers extra perks. You can set up three subscription levels at the price points of $4.99, $9.99, and $24.99 monthly.

5. Twitch Partner Program

With the Twitch Partner Program, you’ll be able to earn a portion of ad revenue generated during your streams. To qualify so you can earn ad revenue, you’ll need to stream regularly, have an established, engaged audience, and be a role model in your Twitch community.

You’ll also need to stream for 25 hours, on 12 different days, with at least 75 viewers on average.

6. Twitch Bits

As a Twitch affiliate, you can earn revenue from Twitch Bits, which is a virtual currency that viewers can use to donate or cheer on streamers.

Each Bit is worth 1 cent and streamers can set a minimum amount of Bits each follower can send.

7. Brand Sponsorships and Partnerships

As your Twitch channel grows in popularity, you can reach out to businesses to discuss partnerships and sponsorships.

Companies are always looking for influencers, so if you have a large enough audience, there are many opportunities available to you.

How to Make Money on Twitch

8. Affiliate Marketing

If your stream is focused on a certain niche or game, you can promote products and services related to that topic and earn a commission from each sale.

9. Stream on Multiple Platforms

If you want to maximize your earning potential, consider streaming on more than just Twitch. You can stream the same content on your YouTube channel, Mixer, Facebook Gaming, and other streaming platforms. You can even upload YouTube videos of your previous Twitch streams.

10. Coaching and Consulting

If you have an established Twitch stream and viewers, you can offer consulting services and coaching. You can charge a fee for these services and help people learn the ins and outs of streaming on Twitch.

11. Upload YouTube Videos of Previous Streams

You can also earn money by uploading clips of your streams to YouTube. You’ll earn a portion of the advertising revenue for every view, so the more views your videos get, the more money you can make.

To qualify for YouTube’s ad revenue, you need at least 1,000 subscribers and 4,000 watch hours in the last 12 months. You can also use many of the Twitch monetization methods discussed above on your YouTube channel.

Advanced Monetization Strategies

As you grow on Twitch, explore advanced monetization strategies to further increase your revenue. Consider hosting exclusive events or streams for subscribers, where you can offer unique content or experiences.

Create premium content or behind-the-scenes access for Patreon supporters. Additionally, think about hosting paid workshops or seminars if you have expertise in a particular area.

These strategies not only provide additional income streams but also add value to your channel, making it more attractive for viewers to subscribe and engage.

More Tips for Making Money with a Twitch Channel

How to Make Money on Twitch

Many streamers find success by using a combination of these methods. Here are a few more tips to help you make money on Twitch:

  • Use Twitch for marketing. Use your streams to promote your brand and other ventures. This could include linking to your Patreon page, mentioning upcoming events or products, and engaging with your audience.
  • Provide value. If you have in-game experience, unique knowledge, or other valuable information to share, offer value to your viewers and followers. This could include game guides, tutorials on streaming, or advice on a specific game.
  • Be creative. Think of innovative and exciting ways to interact with your viewers that are fun and engaging. This could include giveaways, contests, raffles, and more.
  • Utilize social media. Cross-promote your Twitch channel on other social media accounts like Twitter, Instagram, and Facebook to maximize reach and engagement.
  • Mix and match monetization methods. Experiment and see what works best for your channel. Use a combination of all the methods to maximize your earnings. The more streams of income you have, the more successful you’ll be.
Tips for Making Money with a Twitch Channel
1. Use Twitch for Marketing
– Promote Your Brand: Utilize your streams to promote your brand and other ventures. Link to your Patreon page, mention upcoming events or products, and engage with your audience.
2. Provide Value
– Share Valuable Information: If you have in-game experience, unique knowledge, or valuable information to share, offer it to your viewers. Provide game guides, streaming tutorials, or game-specific advice.
3. Be Creative
– Engage with Excitement: Interact with your viewers in innovative and exciting ways. Consider hosting giveaways, contests, raffles, and other interactive activities.
4. Utilize Social Media
– Cross-Promote: Extend your reach and engagement by promoting your Twitch channel on other social media platforms like Twitter, Instagram, and Facebook.
5. Mix and Match Monetization Methods
– Experiment and Maximize Earnings: Try different monetization methods and find what works best for your channel. Combine multiple methods to increase your overall income.

Collaborations and Networking

Collaborating with other Twitch streamers or influencers can significantly boost your channel’s visibility. Through cross-promotion, you can tap into each other’s audiences, potentially gaining new followers and subscribers.

Attend Twitch events, join streamer communities, and actively network to find collaboration opportunities. Collaborations are not just limited to streaming together; they can include joint giveaways, contests, or even creating content for each other’s channels.

Networking can also lead to partnerships and sponsorships, providing additional revenue streams.

Dealing with Challenges and Overcoming Obstacles

Streaming on Twitch can present several challenges, such as market saturation, balancing streaming with personal life, and managing viewer expectations.

It’s important to set realistic goals and expectations for your channel. Stay adaptable and open to changing your content or strategy based on viewer feedback and market trends. Maintain a healthy work-life balance to avoid burnout.

Understand that growth on Twitch can be gradual, and persistence is key. Learning from obstacles and adapting your approach will help you become more resilient and successful in the long run.

Long-term Sustainability on Twitch

To sustain a successful Twitch channel over the long term, it’s important to continuously evolve your content and adapt to changes on the platform. Keep experimenting with new content ideas to keep your streams fresh and engaging.

Stay updated with Twitch’s policies and features to leverage them effectively. Take care of your mental and physical health to avoid burnout. Building a strong, loyal community and diversifying your content and income streams can also provide stability.

Remember, a successful Twitch career is a marathon, not a sprint; staying adaptable, creative, and resilient will help you thrive in the dynamic world of live streaming.

How Much Money Can Twitch Streamers Make?

This is a question many Twitch users have when researching how to make money on Twitch. With so many Twitch streamers out there, it’s hard to say exactly how much money you can make.

It depends on your audience size, the monetization methods you use, and your willingness to put in the time and effort necessary to build an engaged community.

Popular Twitch streamers can easily make thousands of dollars per month, and some even more than that. It all depends on your dedication and willingness to work hard.

 

How Do You Qualify to Become a Twitch Partner?

To qualify for the Twitch Partner Program, you’ll need to have an established and engaged audience, stream often (25 hours a week on 12 different days) with at least three concurrent viewers, and be a positive role model in your community.

You’ll also need to keep up with all of Twitch’s rules and guidelines. Once you’ve reached these requirements, you can apply for the Partner Program and start monetizing your streams with Twitch ads.

How Many Followers Do You Need on Twitch to Make Money?

The number of followers you need to make money on Twitch depends on the monetization methods you use. Some advertisers require a minimum of 1,000 Twitch followers before they’ll consider partnering with your channel.

On the other hand, monetizing through subscriptions and donations requires fewer followers. As long as you have an engaged and supportive community, you’ll be able to make money on Twitch.

How Do You Get Paid on Twitch?

There are various ways Twitch streamers generate revenue. Depending on how you choose to earn money on Twitch will dictate how you’ll be paid. For example, if you are using subscriptions and donations as your primary source of income, you’ll be paid through Twitch directly.

Ad revenue is usually paid by the advertiser, while some other methods like merchandise sales and affiliate links are paid directly to you. Be sure to read the terms and conditions of any contract before signing up for monetization.

Image: Depositphotos



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In the News: December Deadline Grants of up to $100,00 Up For Grabs

by | Dec 9, 2023 | Blog

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Timing and turning in grants on time is paramount for several reasons. Firstly, it ensures that organizations can meet funding deadlines, increasing their chances of securing vital financial support. Secondly, punctuality reflects professionalism, enhancing an organization’s reputation and credibility. Additionally, timely submissions allow for adequate review and revisions, improving the quality of grant proposals.

Ultimately, meeting deadlines demonstrates commitment and reliability, key traits when competing for limited grant opportunities in the highly competitive funding landscape. With that in mind, make sure you turn in your application for the grants that have a December deadline as soon as possible.

With less than a month left in 2023, there’s still time for small businesses to apply for grants to cover different expenses or kick off new projects for 2024. These grants do have a December deadline, so make sure you apply before the due date to give yourself a better chance at winning them.

Some large businesses use small business grant programs to give back to their communities. Such is the case for one tequila brand founded by a major celebrity. Read about this and many other small business grant opportunities available now.

Small Business News December 8, 2023

This week, the news roundup starts with the announcement of the SBA partnering to grow rural American small businesses. The IRS follows with somewhat of a piece of good news as it is delaying the implementation of the new $600 Form 1099-K reporting threshold for third-party settlement organizations for the calendar year 2023. Keep reading to get the latest small business.

The SBA and USDA Partner to Grow Rural American Small Businesses

Administrator Isabel Casillas Guzman of the U.S. Small Business Administration (SBA) announced a strengthened partnership with the U.S. Department of Agriculture (USDA). This collaborative effort aims to bolster job creation and economic growth in rural communities, marking a pivotal moment for America’s 33 million small businesses.

IRS Delays Lower Form 1099-K Reporting Threshold to Aid Small Businesses and Taxpayers

The Internal Revenue Service (IRS) has announced a significant delay in the implementation of the new $600 Form 1099-K reporting threshold for third-party settlement organizations for the calendar year 2023. This decision, detailed in IRS Notice 2023-74, comes after considerable input from taxpayers, tax professionals, and payment processors.

TikTok’s Artist Account GivesMusic Makers a New Outlet

TikTok has introduced the Artist Account, which is designed to transform how musicians and small business owners in the music industry interact with their audience and promote their work. The Artist Account: A New Era of Music Discovery TikTok, already a powerhouse for music discovery, is enhancing this journey with the Artist Account.

Shopify Merchants Smash Records with $9.3 Billion BFCM Sales

Shopify merchants shattered previous records, raking in a colossal $9.3 billion during the Black Friday-Cyber Monday (BFCM) weekend. This figure marks a remarkable 24% surge from last year, illustrating a robust growth trajectory in the online retail sector.

FedEx Announces 2023 Holiday Shipping Deadlines for Timely Deliveries

As the holiday season rapidly approaches, FedEx has released its comprehensive 2023 Shipping Deadlines, ensuring that packages reach their destinations on or before December 24. This announcement is crucial for businesses and individuals planning to send packages domestically and internationally during the festive period.

2023 Holiday Shipping Schedule: Key Deadlines for UPS Deliveries

As the holiday season approaches, understanding the 2023 Holiday Shipping Schedule for UPS is crucial for both businesses and individuals to ensure the timely delivery of packages. UPS has outlined a comprehensive schedule detailing the last days to ship for guaranteed delivery by December 23. Key Dates and Services in the UPS Holiday Shipping Schedule: Monday, Dec.

Amazon’s Record-Breaking Holiday Sales Offer More Deals for Small Business Owners

Amazon announced this year was its most successful Black Friday and Cyber Monday sales event. The 11-day shopping extravaganza, which started on November 17 and concluded on November 27, witnessed a surge in customer savings of nearly 70% compared to last year’s same period.

Adobe Reports Record-Breaking $12.4 Billion Cyber Monday Sales

Adobe has released data showing an unprecedented surge in online spending this Cyber Monday, with consumers spending a record $12.4 billion. This figure marks a 9.6% year-over-year increase and is part of a broader trend of significant growth in e-commerce spending during the 2023 holiday season.

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What Is the Qualified Business Income Deduction (QBI), and Can You Claim It?

What Is the Qualified Business Income Deduction (QBI), and Can You Claim It?

by | Dec 9, 2023 | Blog

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Are you curious about what the qualified business income deduction (QBI) is and whether or not you can take advantage of it? If so, this article will provide an in-depth overview of the QBI deduction and answer the fundamental question: “Can I claim it?”

Given its complicated nature, understanding how to maximize your tax deductions on business income with the QBI deduction should be a top priority for anyone who is self-employed.

Learn all about it here, from what qualifies as eligible business income to when you can use this deduction and more. Let’s dive in!

What is the Qualified Business Income Deduction?

The Qualified Business Income Deduction (QBI) is a recently established tax deduction allowing businesses to deduct as much as 20% of their earnings. This deduction applies to sole proprietorships, partnerships, S corporations, certain trusts, and estates.

The QBI was introduced under the Tax Cuts and Jobs Act of 2017, which sought to provide tax relief for businesses and individuals by reducing income taxes and introducing other incentives.

The QBI has helped to promote business investment and stimulate economic growth throughout the United States.

How Does it Work?

The Qualified Business Income Deduction (QBI) is a great benefit for small business owners, providing the opportunity to deduct up to 20% of their earnings.

This deduction can be used to reduce your taxable income and thus lower your overall tax liability. Here’s a breakdown of exactly how the QBI works:

  • Eligibility: The QBI applies to sole proprietorships, partnerships, S corporations, certain trusts, and estates.
  • Income Limits: The deduction is limited to businesses with taxable income under $170,050 for single filers or $340,100 for joint filers.
  • Types of Income: The QBI applies to business income from activities such as trade or business activities in which individuals are not materially participating.
  • Amounts Deducted: Businesses are able to deduct up to 20% of their earnings, with certain exceptions such as certain publicly traded partnerships.

qualified business income deduction

Which Business Types Can Claim the QBI Deduction?

The QBI deduction is for any specified service trade or business (SSTB) with taxable income under the specified limits. Let’s take a look at the business types that can claim this deduction:

Sole Proprietorships

A sole proprietorship is a business owned and operated by one individual. This type of business does not require registration and can be established in most states with little to no paperwork.

Partnerships

Partnerships are businesses owned by two or more individuals. This type of business is generally easier to set up and manage than a corporation.

S Corporations

An S Corporation is a type of business entity that offers limited liability protection to its owners, as well as certain tax benefits.

Certain Trusts and Estates

A trust is an entity that controls and manages assets for the benefit of a third party. An estate is the legal entity created when an individual dies, which includes their assets and liabilities.

Business Entity Can they claim QBI Deduction? Notes
Sole Proprietorship Yes The deduction is claimed on the individual owner’s tax return.
Partnership Yes Each partner can claim their share of the QBI deduction on their individual tax returns.
S Corporation Yes The shareholders can claim their share of the QBI deduction on their individual tax returns.
Certain Trusts and Estates Yes QBI deductions can be taken on the trust or estate’s return if the income is retained, or on the beneficiary’s return if the income is distributed.

Tax Limits and Taxable Income

Your personal tax return determines whether you’re eligible for the QBI deduction, as well as how much of it you can claim.

The tax limits and taxable income limits vary based on filing status and other factors. Here are two tables on taxable income limits for 2022 and 2023:

Filing status Overall Taxable Income Limitation Available deduction
Single Less than $170,050 20%
Single $170,050 to 220,050 Partial deduction for SSTBs
Single More than $220,050 No deduction for SSTBs
Married Filing Jointly Less than $340,100 20% deduction
Married Filing Jointly $340,100 to $440,100 Partial deduction for SSTBs
Married Filing Jointly More than $440,100 No deduction for SSTBs
Filing status Overall Taxable Income Limitation Available deduction
Single Less than $182,100 20%
Single $182,100 to 232,100 Partial deduction for SSTBs
Single More than $232,100 No deduction for SSTBs
Married Filing Jointly Less than $364,200 20% deduction
Married Filing Jointly $364,200 to $464,200 Partial deduction for SSTBs
Married Filing Jointly More than $464,200 No deduction for SSTBs

What is Not Included in Qualified Business Income?

Qualified Business Income is a valuable deduction that may reduce the amount of taxes owed when filing.

However, there are certain items and types of income which may not qualify for this deduction. These include:

  • Income from passive activities – Passive activities refer to those where the taxpayer does not materially participate in the business such as rental income or investments.
  • Non-trade or non-business related income – This includes items such as interest or dividend income, capital gains, alimony received, certain gambling winnings, and other non-business related sources.
  • Reasonable compensation – Reasonable compensation from an S Corporation is excluded from QBI, but allocated expenses such as health insurance and retirement contributions can be deducted from QBI to offset tax liability.
  • Guaranteed payments for services rendered – If a partner provides services to a partnership or LLC, any guaranteed payments they receive are considered to be W-2 income and do not qualify for the QBI deduction.
  • Capital gains – Capital gains are profits made on the sale of investments such as stocks and bonds. These profits also do not qualify for the QBI deduction.

What is Not Included in Qualified Business Income?

Limitations of the QBI Deduction

The QBI deduction may offer considerable tax savings to businesses, but there are certain limitations that can restrict the amount of savings realized through this deduction. Below are a few of the major limitations:

Wage limitation

Higher earners, meaning those with incomes over $170,050 for single individuals or $340,100 for married filing jointly, may be subject to wage limitation restrictions which can reduce or eliminate QBI deduction eligibility.

20% cap

Generally speaking, the QBI deduction does not exceed 20% of qualified business income. While this is generally beneficial for businesses and self-employed individuals, it also means there’s a limit to the amount that can be deducted from taxable income.

Be sure to research how to file self-employment taxes as well as the best tax software for self-employed to make sure you’re paying your correct self-employment tax. Your state might not have one.

Aggregation requirements

The IRS requires certain trades or businesses to combine their incomes when taking advantage of the QBI deduction in an effort to prevent overstating deductions.

This includes multiple entities owned by one joint return filer as well as a partnership and S corporation owned by the same individual.

Employment rules

Employers offering employee benefits such as health insurance and retirement plans may have more complex rules around who qualifies for deductible wages as they relate to the QBI deduction.

Understanding these rules is vital in order to make sure eligible employees are given access to these benefits while staying compliant with IRS regulations.

How is the QBI Deduction Calculated?

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image: keepertax
Calculating the Qualified Business Income (QBI) deduction is not a particularly difficult process, but it’s important to make sure the calculation is done accurately in order to maximize savings. Here’s an overview of how it can be calculated:

Determine net income

The first step is to calculate the net income of the business by subtracting allowable deductions from gross income. This includes costs such as labor, cost of goods sold, and any other expenses related to running the business. Make sure to learn about the standard deduction 2022.

Subtract for depreciation, amortization, and depletion

Once net income has been determined, specific items such as depreciation and amortization need to be subtracted from this amount in order to arrive at a new figure referred to as “Qualified Business Income.”

Calculate taxable income without QBI deduction

To get total taxable income without taking advantage of the QBI deduction, subtract QBI from net income, then determine taxable income using normal methods.

Calculate taxable income with QBI deduction

To calculate taxable income with the QBI deduction applied, simply subtract 20% of qualified business income from total taxable income before adding on taxes owed on other forms of non-business related incomes such as capital gains or alimony received.

How to Claim the Qualified Business Income Deduction

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Claiming the Qualified Business Income (QBI) deduction can significantly reduce your tax burden, but it requires careful attention to detail and adherence to IRS guidelines. Here’s a step-by-step guide to help you navigate the process:

Step 1. Start with Form 1040

Start with Form 1040, the backbone of your tax return. This form captures your overall income, including wages, dividends, and, of course, business income.

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Filling out Form 1040 helps determine your base taxable income before taking the QBI deduction into consideration. It’s essential to accurately report all income streams here, as they collectively determine your eligibility for the QBI deduction.

Here’s a breakdown of its key points:

  1. Purpose of Form 1040: Form 1040 is used to calculate your base taxable income. This is the starting point before applying any specific deductions, including the QBI.
  2. Accuracy in Reporting All Income: The form requires you to report all income streams, not just business income. The comprehensive income reported on Form 1040 impacts your eligibility for the QBI deduction.
  3. Inclusion of Various Income Types: Besides your business income, it’s crucial to include all other income types. This can include capital gains (profits from the sale of property or investments), alimony received (if applicable), and any other income sources. These additional income streams contribute to your overall taxable income, which is a factor in determining your eligibility and the amount you can claim for the QBI deduction.

Step 2. Fill out Schedules C & SE

Depending on the type of business you own, you may need to fill out additional forms such as Schedules C and SE which detail your income from self-employment and any related expenses. Schedule C

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is used to report income from an unincorporated business, while Schedule SE

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is used for self-employment earnings. Make sure nondeductible expenses such as home office expenses aren’t included on these forms.

Key Considerations

  • Non-Deductible Expenses: Be mindful of expenses that are not deductible on these forms. For instance, personal home office expenses must meet specific IRS criteria to be deductible. Make sure to differentiate between personal and business expenses clearly.
  • Accuracy is Crucial: Inaccuracies in reporting income or expenses on Schedules C and SE can lead to errors in your QBI deduction calculation. Ensure that all entries are accurate and backed by documentation.
  • Consulting a Professional: Given the complexities of tax laws and the potential for nuanced situations in your business finances, consulting with a tax professional can be very beneficial. They can provide guidance on what can and cannot be deducted and help ensure that your forms are filled out correctly.

By thoroughly and accurately completing Schedules C and SE, you lay the groundwork for calculating your QBI deduction correctly. This step is crucial in ensuring you take full advantage of the tax benefits available to you as a self-employed individual. Remember, the more precise your inputs on these forms, the more accurate your QBI deduction calculation will be.

Step 3. Calculate net income

Once all relevant forms have been filled out, total net income can be calculated by subtracting allowable deductions from gross income on Schedule C or SE. You’ll want to make sure you include all relevant deductions, such as labor costs and cost of goods sold.

Guide to ensure accuracy in calculating net income

Calculating your net income is a pivotal step in claiming the Qualified Business Income Deduction. Here’s a detailed guide to ensure accuracy in this process:

Understanding Gross Income

  • Definition: Gross income is the total amount your business earned before any deductions are applied. This includes all revenue streams such as sales, services, returns, allowances, and any other income.
  • Where to Find It: On Schedule C, your gross income is reported at the top of the form, reflecting the total income from your business operations.

Identifying Allowable Deductions

  • Types of Deductions: Allowable deductions encompass a range of business expenses. These can include labor costs (like wages paid to employees), cost of goods sold (COGS), office supplies, travel expenses, advertising costs, and other necessary business expenses.
  • Criteria for Deductions: To be deductible, expenses must be both ordinary (common and accepted in your field of business) and necessary (helpful and appropriate for your business). Ensure each expense meets these criteria.

Calculating Net Income

  • Subtracting Deductions from Gross Income: On Schedule C, subtract your total business expenses from your gross income. This calculation yields your net business income, which is the figure you’ll use for further QBI calculations.
  • Importance of Accuracy: It’s crucial to be thorough and precise in this calculation. Underreporting income or overstating deductions can lead to inaccuracies in your QBI deduction and potentially invite scrutiny from the IRS.

Special Considerations

  • Personal vs. Business Expenses: Be vigilant in separating personal expenses from business expenses. Only business-related expenses should be included in your calculations.
  • Documentation: Keep detailed records and receipts of all expenses. This documentation is essential not only for accurate calculation but also as proof in case of an IRS audit.
  • Professional Advice: Consulting a tax professional can be very helpful, especially if your business has complex expenses or you’re unsure about specific deductions.

Review and Double-Check

  • Revisit Calculations: After calculating your net income, review it to ensure all figures are accurate and all relevant expenses have been included.
  • Cross-Referencing: Compare your net income with your financial records and bank statements to ensure consistency.

Step 4. Complete Form 8995

Form 8995

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Details qualified business income and will help calculate eligibility for the QBI deduction and how much can be deducted. To fill out the form, you’ll need to enter total net income from Step 3, as well as any special deductions such as depreciation, amortization, or depletion.

Step 5. File tax return

Finally, after all of the required forms are completed, you can file your tax return. Here is a breakdown of the key steps to take:

A. Finalizing Your Tax Forms

  • Complete All Necessary Forms: Ensure that all forms related to your business income, including Schedule C, Schedule SE, and Form 8995 for the QBI deduction, are thoroughly completed.
  • Review for Accuracy: Double-check all entries on these forms for accuracy. Ensure that income, deductions, and the QBI calculation are correctly reported.

B. Assembling Your Tax Return

  • Attach Form 8995: Form 8995, which details your QBI deduction, should be attached to your tax return. This form is vital as it communicates to the IRS that you are claiming the QBI deduction.
  • Organize Supporting Documentation: While not required to be submitted, it’s essential to have all relevant documentation organized and readily available. This includes records of income, expenses, and any calculations related to your QBI deduction.

C. Filing the Tax Return

  • Choose Your Filing Method: You can file your taxes electronically or by mail. Electronic filing is generally faster, more secure, and offers quicker confirmation that the IRS has received your return.
  • Use Trusted Tax Software or a Professional: If you choose to file electronically, you can use IRS-approved tax software. For added confidence, consider using a qualified tax professional who can ensure that your return is accurate and compliant with the latest tax laws and regulations.

D. Seeking Professional Advice

  • Consult a Tax Professional: Tax laws are complex and frequently change. Consulting a tax professional can provide you with tailored advice and peace of mind, ensuring that your tax return, including the QBI deduction, is prepared correctly.
  • Tax Planning for the Future: A tax professional can also assist in tax planning for future years, helping you make informed decisions to increase your QBI deduction in the following years.

E. After Filing

  • Keep Records: Retain copies of your tax return and all supporting documents for at least three years. These records are crucial in the event of an IRS audit.
  • Monitor for IRS Communication: After filing, watch for any communication from the IRS. If there are questions or additional information is required, respond promptly to avoid delays or complications.

F. Understanding Your Tax Liability

  • Review Your Return for Insights: Once your return is filed, review it to understand your tax liability and how the QBI deduction impacted your taxes.
  • Plan for Next Year: Use this information to plan for the next tax year, considering any changes in your business that might affect your QBI deduction.

QBI Deduction Example

Let’s look at a concrete example of how the qualified business income deduction (QBI) works in practice. Imagine a married filing jointly couple who earned $200,000 in taxable income from their business. Assuming all other criteria are met, they will be eligible for the QBI deduction and can deduct up to 20% of their earnings, or $40,000. This means the couple would only end up paying taxes on the remaining $160,000.

The Bottom Line

The qualified business income deduction is a complex tax break that has the potential to save you a lot of money, but it comes with a lot of rules and restrictions.

This article has provided an overview of the QBI deduction and some of the key considerations you need to take into account when determining if you’re eligible.

By doing your research and staying up to date on tax laws, you can make sure that you are taking full advantage of this valuable deduction. When in doubt, consult with a tax professional or follow the free tax advice the IRS provides on its website.

QBI deduction reduce

What does the QBI deduction reduce?

The qualified business income deduction (QBI) reduces taxable income and can help lower the overall amount you have to pay in taxes. By reducing your taxable income, the QBI deduction can effectively reduce your tax liability.

Can you claim qualified business income deductions on your rental property?

Yes, it is possible to claim the qualified business income deduction (QBI) on rental properties if they meet certain criteria.

To qualify for the QBI deduction, the property must be used in a trade or business and generate income. The rental activity must also be performed with some regularity and consistency, meaning that it is not just an occasional or incidental activity.

Finally, you must be actively involved in managing the rental property in order to be eligible for the deduction.

Is interest income included in the qualified business income tax deduction?

No, interest income is not eligible for the qualified business income deduction (QBI). The QBI deduction is intended to reduce the taxable income of businesses that meet certain criteria, such as being engaged in a trade or business with regularity and consistency and actively managed by the taxpayer.

Interest income, however, does not qualify as business income under this criteria and cannot be included in the QBI deduction.

qualified business income deduction

Who Cannot take the QBI deduction?

Generally, anyone who meets the criteria outlined above can take the QBI. This includes individuals, trusts, and estates as well as pass-through businesses such as partnerships and LLCs.

However, there are certain taxpayers who are not eligible to receive the QBI deduction. These include specified service trades or businesses (SSTBs), qualified joint ventures, C corporations, certain single-member LLCs, and taxpayers excluded from claiming this deduction under the foreign or possession of income provisions.

Who qualifies for the 20% pass-through deduction?

In order to qualify for the 20% pass-through deduction, you must meet several criteria, including the following:

  • Business Structure: Only entities structured as a sole proprietorship, partnership, S corporation, or an LLC treated as a sole proprietorship or partnership for tax purposes qualify. C corporations do not qualify for the deduction.
  • Qualified Business Income: To qualify, the income must be from a U.S. trade or business. Qualified business income includes the net amount of income, gain, deduction, and loss from any qualified trade or business. Importantly, it doesn’t include investment-related income, wages, or reasonable compensation received by shareholders of S corporations or partners in a partnership.
  • Taxpayer’s Taxable Income: The taxpayer’s taxable income must not exceed certain thresholds, which for the tax year 2021, is $164,900 for single filers and $329,800 for joint filers. If taxable income is above these thresholds, the amount of the QBI deduction may be limited or phased out. These thresholds are adjusted annually for inflation.
  • Type of Business: For taxpayers with income above the threshold, the deduction may be limited or not available at all if the business is a specified service trade or business (SSTB). SSTBs include businesses in the fields of law, health, consulting, athletics, financial services, and any business where the principal asset is the reputation or skill of one or more of its employees or owners.
  • W-2 Wages and Capital Limitations: For taxpayers with taxable income above the threshold, the deduction is subject to a limit that’s the greater of 50% of W-2 wages paid by the business or 25% of W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property (tangible property subject to depreciation used in the business).

As the above points illustrate, the 20% pass-through deduction is complex and depends on various factors. It’s recommended that individuals consult with a tax professional to ensure they fully understand these rules and how they apply to their specific circumstances.

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