Culver’s has grown to more than 1,000 family-owned restaurants across 26 states, and each restaurant operates under its own franchise agreement. When those restaurants are held in separate business entities, every location can appear to be its own business on paper. The IRS may see it differently.
Under Section 448(c) and related aggregation rules, businesses with common owners may be treated as a single taxpayer depending on how ownership is split, so a growing Culver’s franchise group can reach a $32 million federal threshold even though single restaurants never do.
What Is the Section 448(c) Gross Receipts Test?
Section 448(c) is a federal size test that determines if a business counts as a small business taxpayer. It takes the business’s average annual gross receipts over the three tax years before the current year and compares that average to a threshold, currently $32 million, which the IRS adjusts for inflation each year.
For a Culver’s franchise group, gross receipts generally include:
- Sales from every restaurant, counted before food, labor, and other costs are subtracted
- Other business income, such as interest or rent
Sales tax collected from guests and passed along to the state generally isn’t counted. A business that hasn’t existed for all three prior years uses the years it has been open, with any partial year adjusted to a full-year amount.
What Does Section 448(c) Do for Culver’s Franchisees?
The gross receipts test works as a gate. Every business structure, including individuals, corporations, partnerships, and LLCs, is measured against it, and staying at or under the threshold can open access to certain tax rules. Three of those rules are worth a closer look for Culver’s franchise groups.
- Cash-method accounting. Under the cash method, income is recorded when money comes in, and expenses are recorded when they’re paid. C corporations and partnerships with a C corporation owner can use the cash method only if they pass the test. Businesses that don’t qualify as small business taxpayers may need to use the accrual method, which records income when it’s earned and expenses when they’re incurred.
- Inventory accounting options. Businesses that do not stay under the threshold may be required to capitalize carrying costs of the inventory, such as storage costs and labor costs to handle the inventory.
- Relief from the business interest limit. Section 163(j) generally caps how much business interest a company can deduct in a year at its business interest income plus 30% of a version of its taxable income. Qualifying small business taxpayers are generally exempt from that cap. For businesses subject to it, interest above the cap can’t be deducted that year and generally carries forward to later years, according to the IRS instructions for the interest limit.
Relief from the interest limit carries extra weight for Culver’s owners, since each new restaurant is typically a sizable build. The Culver’s Franchise Disclosure Document (FDD) estimates a total initial investment between roughly $3.4 million and $10.3 million per restaurant, and any portion financed with loans adds interest expense.
How Are Gross Receipts for Section 448(c) Calculated?
The calculation follows three steps:
- Add up gross receipts for each of the three prior tax years.
- Divide the total by three.
- Compare the result to the current threshold.
For example, a hypothetical Culver’s franchise group with combined gross receipts of $27 million, $30 million, and $33 million over the three prior years would have a total of $90 million. Divided by three, that’s an average of $30 million, which falls under the threshold even though the most recent year topped $32 million.
The test repeats every year, so a group’s status can change as restaurants open and sales grow.
Do Multiple Culver’s Entities Count Toward the Section 448(c) Threshold?
In many cases, yes. For the gross receipts test, the IRS combines related businesses in two ways. Corporations linked by ownership form a controlled group, and other related businesses, such as partnerships and sole proprietorships, can be combined under common control. Either way, the group is treated as a single taxpayer.
Entities that may be combined include:
- Restaurant entities owned by the same parent company
- Sister entities held by the same small group of family members or partners
- Other businesses controlled by the same owners, such as a property-holding company or a management company
The ownership tests are precise. A parent-subsidiary group generally forms when a parent owns more than 50% of another entity. A brother-sister group generally forms when five or fewer individuals own at least 80% of each entity and more than 50% on an identical basis across them. Because these tests turn on exact percentages, each group’s result depends on its own ownership structure.
The current Culver’s Franchise Disclosure Document (FDD) generally requires the Operator of each restaurant to hold an ownership stake, though terms can vary by agreement. When the same Operator, family, or partners hold ownership in several Culver’s entities, those entities may be combined under these rules.
How Many Culver’s Restaurants Reach the $32 Million Threshold?
The most recent Culver’s FDD reports average gross sales of $4,142,737 per restaurant.
Using that average in a simplified example, seven restaurants equal about $29 million and eight equal about $33.1 million. In this example, the group of roughly eight Culver’s restaurants under common ownership could approach or cross the combined threshold. Since the test uses a three-year average, timing depends on when each restaurant opened and how its sales changed over those years. These figures are illustrations, not projections, and sales at individual restaurants may vary.
What Happens When a Culver’s Group Crosses $32 Million?
Crossing the threshold can bring several changes at once. Entities whose cash-method eligibility depends on the test may need to switch methods, which generally requires filing an accounting method change request with the IRS. The business interest cap may also start to apply across the group, and tax projections, lender conversations, and cash flow plans may need an update.
Because these changes can affect taxes, financing, and cash flow at the same time, it helps to watch the threshold well before the next restaurant opens. A few habits can help a growing franchise group keep the threshold in view:
- Track combined gross receipts across every entity, not just by location.
- Review the three-year average before signing a Development Agreement or Territory Reservation Agreement.
- Keep a current ownership chart for every entity.
- Model the interest deduction before taking on debt for a new build.
How Can MBE CPAs Help Culver’s Franchise Groups?
As the number of restaurants within a Culver’s franchise group adds up, so does the group’s combined tax picture, and it’s a picture no single location’s books can show on their own. MBE CPAs brings franchise-focused tax and advisory experience to Culver’s owners, looking across ownership, sales, and financing for each entity to help identify tax planning opportunities as the group grows.
Growth is worth celebrating, and it’s worth planning for. Schedule a conversation with an MBE CPAs advisor to map your current or planned Culver’s ownership against the Section 448(c) threshold.