Tax Deductibles for the Amortization of Intangibles

Written by dan keen
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Many business expenses are easy to record and calculate, such as the cost of postage, supplies, equipment, utilities and payroll. Receipts and checkbook entries keep track of these tangible items. Many businesses, however, have intangible items that some states and local governments tax businesses on. Intangible aspects of a business also play an important role in adding value to a business when the business is up for sale.

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Intangible Assets

An intangible asset lacks a physical existence. It is a property that cannot be seen or touched yet has value to the business. One example is a trademark and name recognition. If you wanted to open a hamburger stand, the name "Smith's Hamburgers" would not have the same value as the name "McDonald's." The name "McDonald's" is not a physical entity in itself, but it has name recognition, which is a valuable asset to anyone who opens a hamburger franchise.

Common Intangible Assets

"Goodwill" is an intangible asset of a business's expectancy to continue doing business with its current customer base. Workforce assets place a value on the experience and knowledge of employees. Their education, training, skills and ability to do their jobs is not a physical object, but this team is an investment in the company, as without them new workers would have to be trained and would have to build their experience over time. Licenses, permits, copyrights, franchises, trademarks, trade secrets, brand names, research and development efforts and Internet domains are intangibles that increase the value of businesses.

Amortisation

With regard to tax deductions, amortisation is a method of recovering a capital cost by deducting the cost over a period of time rather than deducting the full amount in one tax year. This is similar to the straight line method used for depreciation.

Amortisation of Intangible Assets

Generally, an intangible asset expense is amortised over the item's life expectancy. Copyrights and patents, for example, have identifiable useful lives, since these items have a legal life. Some intangible assets have indefinite useful lives or are assets whose live expectancy is not identifiable. Goodwill and trademarks are prime examples. In such cases, their value can be periodically re-evaluated, as these assets may become more or less valuable over time. For intangible assets that have an indefinite or unidentifiable life expectancy, current tax laws prescribe a 15-year amortisation period.

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