Tax Treatment of Intangibles
IRC Sec 197 allows acquired intangibles like goodwill, going concern value, etc., to be amortized ratably over 15 years.
Amortizable Section 197 intangible assets are those acquired in a trade or business or for the production of income. They include:
-
Goodwill and going concern value
(1), -
Workforce in place
(2), -
Information in place,
-
Know-how,
-
Customer and supplier-based intangibles,
-
Government licenses and permits.
-
Liquor License, Taxi-cab Medallion (or license)
-
Franchises, trademarks, and trade names,
-
Insurance policy expirations, and
-
Bank deposit base.
(1)Going concern value is the value attached to the ability of a business to continue to function and collect income without interruption, even after an ownership change.
(2)Workforce in place refers to the portion of a purchase price attributed to a trained, experienced workforce in place as of the date of acquisition.
The following assets are also treated as Section 197 assets, if they are acquired in connection with the acquisition of a business:
-
Covenants not to compete,
-
Computer software,
-
Films,
-
Sound recordings,
-
Video tapes and books,
-
Copyrights and patents,
-
Rights to receive tangible property or services,
-
Interest in patents and copyrights,
-
Mortgage servicing rights secured by residential real property, and
-
Contract rights good for less than 15 years or fixed in amount.
Different rules apply for self-created intangible assets (e.g., goodwill created through advertising). Self-created intangible assets are generally capitalized except:
The regulations don’t require a taxpayer to capitalize (they can be expensed) under Code Sec. 263(a) amounts paid to create or enhance an intangible asset, or the related transaction costs, if the amounts do not create or enhance any right or benefit for the taxpayer that extends beyond the earlier of:
-
12 months after the first date on which the taxpayer realizes the right or benefit, or
-
The end of the tax year following the tax year in which the payment is made. (Regulation § 1.263(a)-4(f))