Intangible assets, like patents and goodwill, play a crucial role in business valuations. Tax rules for these non-physical assets can be complex, with special amortization treatments under IRC Section 197. Understanding these rules is key for effective tax planning and compliance.

Most acquired intangibles are amortized over 15 years, regardless of their actual useful life. This standardized approach simplifies tax calculations but may not reflect the true economic value of the asset. Non-Section 197 intangibles follow different rules, potentially allowing for shorter amortization periods.

Intangible Assets for Tax Purposes

Definition and Characteristics

• Non-physical assets providing long-term economic benefits to businesses (patents, copyrights, goodwill)
• Must have determinable useful life and be held for business or income production
• Cost basis includes purchase price and additional acquisition/preparation costs
• Subject to special tax rules under Internal Revenue Code Section 197
• Self-created intangibles (internally developed goodwill) not amortizable unless acquired in business acquisition

Tax Treatment Considerations

• Governed by IRC Section 197 for amortization purposes
• Amortization begins on first day of acquisition month
• Software may have shorter amortization periods under specific criteria
• Non-Section 197 intangibles amortized over useful life or 15 years, whichever is shorter
• Amortization for business combination intangibles starts on acquisition date

Amortizable Life of Intangible Assets

Section 197 Intangibles

• Most acquired intangibles amortized over 15-year period regardless of actual useful life
• 15-year period starts on first day of acquisition month
• Applies to goodwill, going concern value, and certain customer-based intangibles
• Covers intangibles acquired as part of business purchase

Non-Section 197 Intangibles

• Patents and copyrights acquired separately amortized over determinable useful life or 15 years, whichever is shorter
• Software may qualify for shorter amortization periods under specific tax code criteria
• Land use rights with indefinite terms treated as non-amortizable
• Research and experimental expenditures subject to different tax treatment (amortization or immediate expensing)

Amortization Expense Calculation

Straight-Line Method

• Required method for Section 197 intangibles
• Annual expense calculated by dividing adjusted basis by months in amortization period, then multiplying by 12
• Formula: $Annual Amortization Expense = (Adjusted Basis / Amortization Period in Months) 12$
• Partial year amortization prorated based on months held during tax year
• Deduction taken regardless of asset usage during tax year

Special Considerations

• Contingent payments or purchase price adjustments require special calculation rules
• Proration formula for partial year: $Partial Year Expense = (Annual Expense / 12) Months Held$
• Foreign operation intangibles may have different rules based on international tax considerations
• Amortization continues even if asset becomes worthless during amortization period

Amortizable vs Non-Amortizable Intangibles

Amortizable Intangibles

• Acquired as part of business purchase (goodwill, going concern value, customer-based intangibles)
• Patents and copyrights with determinable useful lives
• Certain software meeting specific tax code criteria
• Franchise agreements with limited terms

Non-Amortizable Intangibles

• Self-created assets (internally developed goodwill, trademarks)
• Land use rights with indefinite terms
• Certain intangibles used in foreign operations based on international tax rules
• Intangibles with indeterminable useful lives