Amortization of Intangible Costs - John R. Dundon II, Enrolled Agent
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Amortization of Intangible Costs

Amortization of Intangible Costs

Also commonly referred to as 197 Intangibles, the following costs must be amortized (deducted as an expense) over 15 years (180 months) starting with the later of (a) the month the intangibles were acquired or (b) the month the trade or business or activity engaged in for the production of income begins:

  • Goodwill;

  • Going concern value;

  • Workforce in place;

  • Business books and records, operating systems, or any other information base;

  • A patent, copyright, formula, process, design, pattern, know-how, format, or similar item;

  • A customer-based intangible (e.g., composition of market or market share);

  • A supplier-based intangible;

  • A license, permit, or other right granted by a governmental unit;

  • A covenant not to compete entered into in connection with the acquisition of a business; and

  • A franchise, trademark, or trade name (including renewals).

A longer period may apply to section 197 intangibles leased under a lease agreement entered into after March 12, 2004, to a tax-exempt organization, governmental unit, or foreign person or entity (other than a partnership). See section 197(f)(10).

A section 197 intangible is treated as depreciable property used in your trade or business. When you dispose of a section 197 intangible, any gain on the disposition, up to the amount of allowable amortization, is recaptured as ordinary income. If multiple section 197 intangibles are disposed of in a single transaction or a series of related transactions, calculate the recapture as if all of the section 197 intangibles were a single asset. This does not apply to section 197 intangibles disposed of for which the fair market value exceeds the adjusted basis.  In some cases based on the exit strategy of your investment and how the investment fits into your portfolio you may be best served from an overall tax strategy to NOT amortize particularly considering the amortization expense is recaptured as ordinary income when the investment is disposed.

For those of you that are partial owners of a tenants in common (TIC) real estate investment take care to discuss the amortization of intangible as well as start up expenses with someone that has gone through the whole cycle before from a tax perspective the benefits and drawbacks of electing to amortize.

 



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