How long are intangibles amortized

Under the INDOPCO regulations, the landlord must capitalize the contract termination payment, because it is a category 2 intangible asset. Example 11—lease-cancellation fee: L, from the previous example, pays the lease-cancellation fee because it wants to construct improvements on the premises. Example 12—lease-cancellation fee: L, from the previous example, pays the lease-cancellation fee because it wants to rent the premises to a new tenant who is willing to pay more rent than the current one.

L enters into a six-year lease with the new tenant. This result is reasonable, because the cancellation fee resembles a lease acquisition cost that, under Sec. New Regs. In essence, it applies 1 to created intangible assets category 2 intangible assets , 2 with unascertainable useful lives, 3 for which another amortization period is not prescribed by the Code, regulations or published guidance and 4 for which amortization is not prohibited. Example 13—membership fee: In year 1, F Co.

It is not an amortizable Sec. If the membership is for an indefinite period, so that F cannot establish its useful life, the year amortization safe harbor would apply. Planning tip: The newly created year amortization safe harbor under Sec. If taxpayers can support a shorter amortization period, through their experience with similar assets or economic life studies, they can accelerate their amortization deductions.

Part II of this article, in the May issue, will discuss other aspects of capitalizing and amortizing intangible assets, such as the income-forecast method, lease acquisitions, options, computer software, and transaction and business acquisition costs.

For more information about this article, contact Prof. Witner at lwitner cox. Until guidance is issued, this category is an open question. Business meal deductions after the TCJA. This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction.

This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID Toggle search Toggle navigation. Executive Summary Regulations issued in require capitalization of six categories of intangible asset expenditures.

This two-part article: Summarizes the new Sec. Most IP is covered under Section Examples of these Section intangible assets include patents , goodwill, trademarks , and trade and franchise names. There are certain exclusions, such as software acquired in a transaction that is readily available for purchase by the general public, subject to a nonexclusive license, and has not been substantially modified. In those cases and select others, the intangibles are amortized under Section Per GAAP, businesses amortize intangibles over time to help tie the cost of an asset to the revenues it generates in the same accounting period.

When a parent company purchases a subsidiary company and pays more than the fair market value FMV of the subsidiary's net assets, the amount over fair market value is posted to goodwill an intangible asset. IP is initially posted as an asset on the firm's balance sheet when it is purchased. For instance, a company may win a patent for a newly developed process, which has some value. That value, in turn, increases the value of the company and so must be recorded appropriately. In either case, the process of amortization allows the company to write off annually a part of the value of that intangible asset according to a defined schedule.

Assets are used by businesses to generate revenue and produce income. Over a period of time, the costs related to the assets are moved into an expense account as the useful life of the asset dwindles. By expensing the cost of the asset over a period of time, the company is complying with generally accepted accounting principles GAAP , which requires the matching of revenue with the expense incurred to generate the revenue.

Tangible assets are expensed using depreciation, and intangible assets are expensed through amortization. Depreciation generally includes a salvage value for the physical asset—the value that the asset can be sold for at the end of its useful life.

Amortization doesn't take into account a salvage value. Intangible amortization is reported to the IRS using Form For accounting financial statement purposes, a company can choose from six amortization methods—straight line, declining balance, annuity, bullet, balloon, and negative amortization. There are only four depreciation methods that can be used for accounting purposes—straight line, declining balance, sum-of-the-years' digits , and units of production.

For tax purposes, there are two options for amortization of intangibles that the IRS allows—straight line and the income forecast method. The income forecast method can be used instead of the straight-line method if the asset is: motion picture films, videotapes, sound recordings, copyrights, books, or patents.

The useful lives of certain intangible assets will surprise some CPAs given the way Statement no. Consider examples of intangible assets that are the result of contractual or legal rights—patents, licenses, trademarks and franchise and servicing rights.

The contract benefits typically are for a legally set period of time and may or may not be explicitly renewable.

Statement no. If the contract includes renewal provisions, the useful life may very well be indefinite. A notable finding from deep within an appendix to Statement no.

In other words, consistently basing the useful life on the specified term of the contract is too simplistic an approach, particularly when it is reasonable to believe the benefits the asset provides will continue beyond the contract period. Based on the guidance in Statement no. Note: There is one circumstance CPAs should consider before exploring the three questions. If the benefits the contract provides are not expected to continue to the expiration date, there is no reason for the CPA to explore these questions.

The useful life for amortization would be the best estimate of the period over which the benefits will continue. As this circumstance is atypical, most should read on to determine whether to amortize the asset. Can it be renewed or extended? CPAs first should address whether the company intends to renew or extend the contract. For example, a broadcast company may be abandoning its operations in an unprofitable service area and will not need to renew a broadcast license for the area.

Once the company has decided it will not renew the license, then the next two questions need not be considered. The useful life is limited to the term of the contract. If the company intends to renew the contract because it will continue to service the area, the CPA should determine whether renewal or extension is possible.

In some cases, the contract will stipulate that it is. If it has successfully extended this contract or similar ones in the past, this is evidence of what it may do in the future. If the type of contract is new for the company, the CPA might obtain information from other companies in the same industry. For example, competing broadcasters may have renewed similar contracts, providing a basis for believing this company could do the same.

Of course, if there are stipulations in the contract that prohibit the company from renewing or extending it, the useful life likely is limited to the contract term. Workforce in place does not include any covenant not to compete or other similar arrangement described in paragraph b 9 of this section.

Section intangibles include any information base, including a customer-related information base. For this purpose , an information base includes business books and records, operating systems, and any other information base regardless of the method of recording the information and a customer-related information base is any information base that includes lists or other information with respect to current or prospective customers.

Thus, the amount paid or incurred for information base includes, for example , any portion of the purchase price of an acquired trade or business attributable to the intangible value of technical manuals, training manuals or programs, data files, and accounting or inventory control systems.

Other examples include the cost of acquiring customer lists, subscription lists, insurance expirations, patient or client files, or lists of newspaper, magazine, radio, or television advertisers.

Section intangibles include any patent , copyright, formula, process, design, pattern, know-how, format, package design, computer software as defined in paragraph c 4 iv of this section , or interest in a film, sound recording, video tape, book, or other similar property.

See, however, the exceptions in paragraph c of this section. Section intangibles include any customer-based intangible. A customer-based intangible is any composition of market, market share, or other value resulting from the future provision of goods or services pursuant to contractual or other relationships in the ordinary course of business with customers.

Thus, the amount paid or incurred for customer-based intangibles includes, for example , any portion of the purchase price of an acquired trade or business attributable to the existence of a customer base, a circulation base, an undeveloped market or market growth, insurance in force, the existence of a qualification to supply goods or services to a particular customer, a mortgage servicing contract as defined in paragraph c 11 of this section , an investment management contract , or other relationship with customers involving the future provision of goods or services.

In addition, customer-based intangibles include the deposit base and any similar asset of a financial institution. Thus, the amount paid or incurred for customer-based intangibles also includes any portion of the purchase price of an acquired financial institution attributable to the value represented by existing checking accounts, savings accounts, escrow accounts, and other similar items of the financial institution.

However, any portion of the purchase price of an acquired trade or business attributable to accounts receivable or other similar rights to income for goods or services provided to customers prior to the acquisition of a trade or business is not an amount paid or incurred for a customer-based intangible. Section intangibles include any supplier-based intangible. A supplier-based intangible is the value resulting from the future acquisition , pursuant to contractual or other relationships with suppliers in the ordinary course of business, of goods or services that will be sold or used by the taxpayer.

Thus, the amount paid or incurred for supplier-based intangibles includes, for example , any portion of the purchase price of an acquired trade or business attributable to the existence of a favorable relationship with persons providing distribution services such as favorable shelf or display space at a retail outlet , or the existence of favorable supply contracts. The amount paid or incurred for supplier-based intangibles does not include any amount required to be paid for the goods or services themselves pursuant to the terms of the agreement or other relationship.

In addition, see the exceptions in paragraph 2 c of this section, including the exception in paragraph 2 c 6 of this section for certain rights to receive tangible property or services from another person. This section applies to supplier-based intangibles acquired after July 6, Section intangibles include any license, permit, or other right granted by a governmental unit including, for purposes of section , an agency or instrumentality thereof even if the right is granted for an indefinite period or is reasonably expected to be renewed for an indefinite period.

These rights include, for example , a liquor license, a taxi-cab medallion or license , an airport landing or takeoff right sometimes referred to as a slot , a regulated airline route, or a television or radio broadcasting license. The issuance or renewal of a license, permit, or other right granted by a governmental unit is considered an acquisition of the license, permit, or other right.

See, however, the exceptions in paragraph c of this section, including the exceptions in paragraph c 3 of this section for an interest in land , paragraph c 6 of this section for certain rights to receive tangible property or services , paragraph c 8 of this section for an interest under a lease of tangible property , and paragraph c 13 of this section for certain rights granted by a governmental unit.

See paragraph b 10 of this section for the treatment of franchises. Section intangibles include any covenant not to compete, or agreement having substantially the same effect, entered into in connection with the direct or indirect acquisition of an interest in a trade or business or a substantial portion thereof. For purposes of this paragraph b 9 , an acquisition may be made in the form of an asset acquisition including a qualified stock purchase that is treated as a purchase of assets under section , a stock acquisition or redemption, and the acquisition or redemption of a partnership interest.

An agreement requiring the performance of services for the acquiring taxpayer or the provision of property or its use to the acquiring taxpayer does not have substantially the same effect as a covenant not to compete to the extent that the amount paid under the agreement represents reasonable compensation for the services actually rendered or for the property or use of the property actually provided.

The term franchise has the meaning given in section b 1 and includes any agreement that provides one of the parties to the agreement with the right to distribute, sell, or provide goods, services , or facilities, within a specified area. The term trademark includes any word, name , symbol, or device, or any combination thereof, adopted and used to identify goods or services and distinguish them from those provided by others. The term trade name includes any name used to identify or designate a particular trade or business or the name or title used by a person or organization engaged in a trade or business.

A license, permit, or other right granted by a governmental unit is a franchise if it otherwise meets the definition of a franchise. A trademark or trade name includes any trademark or trade name arising under statute or applicable common law, and any similar right granted by contract.

The renewal of a franchise, trademark, or trade name is treated as an acquisition of the franchise, trademark, or trade name. See paragraph g 6 of this section. Section intangibles include any right under a license, contract , or other arrangement providing for the use of property that would be a section intangible under any provision of this paragraph b including this paragraph b 11 after giving effect to all of the exceptions provided in paragraph c of this section.

Section intangibles also include any term interest whether outright or in trust in such property. Section intangibles include any other intangible property that is similar in all material respects to the property specifically described in section d 1 C i through v and paragraphs b 3 through 7 of this section.

See paragraph g 5 of this section for special rules regarding certain reinsurance transactions. The term section intangible does not include property described in section e. The following rules and definitions provide guidance concerning property to which the exceptions apply:.

Section intangibles do not include an interest in a corporation , partnership , trust , or estate. Thus, for example , amortization under section is not available for the cost of acquiring stock , partnership interests , or interests in a trust or estate, whether or not the interests are regularly traded on an established market.

See paragraph g 3 of this section for special rules applicable to property of a partnership when a section election is in effect for the partnership. Section intangibles do not include an interest under an existing futures contract , foreign currency contract , notional principal contract , interest rate swap, or other similar financial contract , whether or not the interest is regularly traded on an established market.

However, this exception does not apply to an interest under a mortgage servicing contract , credit card servicing contract , or other contract to service another person 's indebtedness, or an interest under an assumption reinsurance contract. See paragraph g 5 of this section for the treatment of assumption reinsurance contracts. Section intangibles do not include any interest in land.

For this purpose , an interest in land includes a fee interest , life estate, remainder, easement, mineral right, timber right, grazing right, riparian right, air right, zoning variance, and any other similar right, such as a farm allotment, quota for farm commodities, or crop acreage base.

An interest in land does not include an airport landing or takeoff right, a regulated airline route, or a franchise to provide cable television service. The cost of acquiring a license, permit, or other land improvement right, such as a building construction or use permit, is taken into account in the same manner as the underlying improvement.

Section intangibles do not include any interest in computer software that is or has been readily available to the general public on similar terms , is subject to a nonexclusive license, and has not been substantially modified.

Computer software will be treated as readily available to the general public if the software may be obtained on substantially the same terms by a significant number of persons that would reasonably be expected to use the software. This requirement can be met even though the software is not available through a system of retail distribution.

For the purpose of determining whether computer software has been substantially modified -. A Integrated programs acquired in a package from a single source are treated as a single computer program; and. B Any cost incurred to install the computer software on a system is not treated as a cost of the software.

However, the costs for customization, such as tailoring to a user's specifications other than embedded programming options are costs of modifying the software. Section intangibles do not include an interest in computer software that is not acquired as part of a purchase of a trade or business.

For other exceptions applicable to computer software, see paragraph a 3 of this section relating to otherwise deductible amounts and paragraph g 7 of this section relating to amounts properly taken into account in determining the cost of property that is not a section intangible.

For purposes of this section, computer software is any program or routine that is, any sequence of machine-readable code that is designed to cause a computer to perform a desired function or set of functions, and the documentation required to describe and maintain that program or routine.

It includes all forms and media in which the software is contained, whether written, magnetic, or otherwise. Computer programs of all classes, for example , operating systems, executive systems, monitors, compilers and translators, assembly routines, and utility programs as well as application programs, are included.

Computer software also includes any incidental and ancillary rights that are necessary to effect the acquisition of the title to, the ownership of, or the right to use the computer software, and that are used only in connection with that specific computer software. Such incidental and ancillary rights are not included in the definition of trademark or trade name under paragraph b 10 i of this section. For example , a trademark or trade name that is ancillary to the ownership or use of a specific computer software program in the taxpayer 's trade or business and is not acquired for the purpose of marketing the computer software is included in the definition of computer software and is not included in the definition of trademark or trade name.

Computer software does not include any data or information base described in paragraph b 4 of this section unless the data base or item is in the public domain and is incidental to a computer program. For this purpose , a copyrighted or proprietary data or information base is treated as in the public domain if its availability through the computer program does not contribute significantly to the cost of the program.

For example , if a word-processing program includes a dictionary feature used to spell-check a document or any portion thereof, the entire program including the dictionary feature is computer software regardless of the form in which the feature is maintained or stored.

Section intangibles do not include any interest including an interest as a licensee in a film, sound recording, video tape, book, or other similar property such as the right to broadcast or transmit a live event if the interest is not acquired as part of a purchase of a trade or business. A film, sound recording, video tape, book, or other similar property includes any incidental and ancillary rights such as a trademark or trade name that are necessary to effect the acquisition of title to, the ownership of, or the right to use the property and are used only in connection with that property.

For purposes of this paragraph c 5 , computer software as defined in paragraph c 4 iv of this section is not treated as other property similar to a film, sound recording, video tape, or book. See section for amortization of excluded intangible property or interests. Section intangibles do not include any right to receive tangible property or services under a contract or from a governmental unit if the right is not acquired as part of a purchase of a trade or business.

Any right that is described in the preceding sentence is not treated as a section intangible even though the right is also described in section d 1 D and paragraph b 8 of this section relating to certain governmental licenses, permits, and other rights and even though the right fails to meet one or more of the requirements of paragraph c 13 of this section relating to certain rights of fixed duration or amount. Section intangibles do not include any interest including an interest as a licensee in a patent , patent application , or copyright that is not acquired as part of a purchase of a trade or business.

A patent or copyright includes any incidental and ancillary rights such as a trademark or trade name that are necessary to effect the acquisition of title to, the ownership of, or the right to use the property and are used only in connection with that property.

Section intangibles do not include any interest as a lessor under an existing lease or sublease of tangible real or personal property. In addition, the cost of acquiring an interest as a lessor in connection with the acquisition of tangible property is taken into account as part of the cost of the tangible property. For example , if a taxpayer acquires a shopping center that is leased to tenants operating retail stores, any portion of the purchase price attributable to favorable lease terms is taken into account as part of the basis of the shopping center and in determining the depreciation deduction allowed with respect to the shopping center.

See section c 2. Section intangibles do not include any interest as a lessee under an existing lease of tangible real or personal property. For this purpose , an airline lease of an airport passenger or cargo gate is a lease of tangible property. If an interest as a lessee under a lease of tangible property is acquired in a transaction with any other intangible property , a portion of the total purchase price may be allocable to the interest as a lessee based on all of the relevant facts and circumstances.

Section intangibles do not include any interest whether as a creditor or debtor under an indebtedness in existence when the interest was acquired. Thus, for example , the value attributable to the assumption of an indebtedness with a below-market interest rate is not amortizable under section In addition, the premium paid for acquiring a debt instrument with an above-market interest rate is not amortizable under section See section for rules concerning the treatment of amortizable bond premium.

For purposes of this paragraph c 9 , an interest under an existing indebtedness does not include the deposit base and other similar items of a financial institution. An interest under an existing indebtedness includes mortgage servicing rights, however, to the extent the rights are stripped coupons under section Section intangibles do not include any franchise to engage in professional baseball, basketball, football, or any other professional sport, and any item even though otherwise qualifying as a section intangible acquired in connection with such a franchise.

Section intangibles do not include any right described in section e 7 concerning rights to service indebtedness secured by residential real property that are not acquired as part of a purchase of a trade or business.

Section intangibles do not include any fees for professional services and any transaction costs incurred by parties to a transaction in which all or any portion of the gain or loss is not recognized under part III of subchapter C of the Internal Revenue Code. A Is acquired in the ordinary course of a trade or business or an activity described in section and not as part of a purchase of a trade or business ;.

C Is not a customer-based intangible, a customer-related information base, or any other similar item; and. Except as provided in paragraph d 2 iii of this section, amortizable section intangibles do not include any section intangible created by the taxpayer a self-created intangible. A Defined. A section intangible is created by the taxpayer to the extent the taxpayer makes payments or otherwise incurs costs for its creation, production, development, or improvement, whether the actual work is performed by the taxpayer or by another person under a contract with the taxpayer entered into before the contracted creation, production, development, or improvement occurs.

For example , a technological process developed specifically for a taxpayer under an arrangement with another person pursuant to which the taxpayer retains all rights to the process is created by the taxpayer.

B Contracts for the use of intangibles. A section intangible is not a self-created intangible to the extent that it results from the entry into or renewal of a contract for the use of an existing section intangible.

Thus, for example , the exception for self-created intangibles does not apply to capitalized costs , such as legal and other professional fees , incurred by a licensee in connection with the entry into or renewal of a contract for the use of know-how or similar property. C Improvements and modifications. If an existing section intangible is improved or otherwise modified by the taxpayer or by another person under a contract with the taxpayer , the existing intangible and the capitalized costs if any of the improvements or other modifications are each treated as a separate section intangible for purposes of this paragraph d.

A The exception for self-created intangibles does not apply to any section intangible described in section d 1 D relating to licenses, permits or other rights granted by a governmental unit , d 1 E relating to covenants not to compete , or d 1 F relating to franchises, trademarks, and trade names.

Thus, for example , capitalized costs incurred in the development, registration, or defense of a trademark or trade name do not qualify for the exception and are amortized over 15 years under section B The exception for self-created intangibles does not apply to any section intangible created in connection with the purchase of a trade or business as defined in paragraph e of this section.

C If a taxpayer disposes of a self-created intangible and subsequently reacquires the intangible in an acquisition described in paragraph h 5 ii of this section, the exception for self-created intangibles does not apply to the reacquired intangible.

Amortizable section intangibles do not include any property to which the anti-churning rules of section f 9 and paragraph h of this section apply. Several of the exceptions in section apply only to property that is not acquired in or created in connection with a transaction or series of related transactions involving the acquisition of assets constituting a trade or business or a substantial portion thereof.

Property acquired in or created in connection with such a transaction or series of related transactions is referred to in this section as property acquired as part of or created in connection with a purchase of a trade or business.

For purposes of section and this section, the applicability of the limitation is determined under the following rules:. An asset or group of assets constitutes a trade or business or a substantial portion thereof if their use would constitute a trade or business under section that is, if goodwill or going concern value could under any circumstances attach to the assets.

For this purpose , all the facts and circumstances , including any employee relationships that continue or covenants not to compete that are entered into as part of the transfer of the assets, are taken into account in determining whether goodwill or going concern value could attach to the assets. The acquisition of a franchise, trademark, or trade name constitutes the acquisition of a trade or business or a substantial portion thereof. For purposes of this paragraph e 2 -.

A A trademark or trade name is disregarded if it is included in computer software under paragraph c 4 of this section or in an interest in a film, sound recording, video tape, book, or other similar property under paragraph c 5 of this section;. B A franchise, trademark, or trade name is disregarded if its value is nominal or the taxpayer irrevocably disposes of it immediately after its acquisition ; and. C The acquisition of a right or interest in a trademark or trade name is disregarded if the grant of the right or interest is not, under the principles of section , a transfer of all substantial rights to such property or of an undivided interest in all substantial rights to such property.

The assets acquired in a transaction or series of related transactions include only assets including a beneficial or other indirect interest in assets where the interest is of a type described in paragraph c 1 of this section acquired by the taxpayer and persons related to the taxpayer from another person and persons related to that other person. For purposes of this paragraph e 3 , persons are related only if their relationship is described in section b or b or they are engaged in trades or businesses under common control within the meaning of section 41 f 1.

The determination of whether acquired assets constitute a substantial portion of a trade or business is to be based on all of the facts and circumstances , including the nature and the amount of the assets acquired as well as the nature and amount of the assets retained by the transferor. The value of the assets acquired relative to the value of the assets retained by the transferor is not determinative of whether the acquired assets constitute a substantial portion of a trade or business.

A qualified stock purchase that is treated as a purchase of assets under section is treated as a transaction involving the acquisition of assets constituting a trade or business only if the direct acquisition of the assets of the corporation would have been treated as the acquisition of assets constituting a trade or business or a substantial portion thereof. Mortgage servicing rights acquired in a transaction or series of related transactions are disregarded in determining for purposes of paragraph c 11 of this section whether the assets acquired in the transaction or transactions constitute a trade or business or substantial portion thereof.

Computer software acquired in a transaction or series of related transactions solely for internal use in an existing trade or business is disregarded in determining for purposes of paragraph c 4 of this section whether the assets acquired in the transaction or series of related transactions constitute a trade or business or substantial portion thereof.

Except as provided in paragraph f 2 of this section, the amortization deduction allowable under section a is computed as follows:. A The first day of the month in which the property is acquired; or.

B In the case of property held in connection with the conduct of a trade or business or in an activity described in section , the first day of the month in which the conduct of the trade or business or the activity begins.