This course examines the U.S. federal tax system as it relates to property transactions of business owners and shareholders. Topics include cost recovery, such as depreciation, amortization, and depletion; calculation of realized versus recognized gains and losses; evaluation of the potential tax effects of nontaxable exchanges; and the combining, or netting, gains and losses that are different in nature. Assignments facilitate self-discovery of knowledge and development of a variety of professional skills.
Amortization
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來自 University of Illinois at Urbana-Champaign 的課程
Federal Taxation II: Property Transactions of Business Owners and Shareholders
22 個評分
從本節課中
Module 3 Amortization and Depletion
In this module, you will take a look at the remaining concepts of cost recovery used in the U.S. Federal tax structure. In the previous module, you learned about depreciation taken on tangible personal and real property. In this module, you will learn how intangible personal and real property costs are recovered through amortization, and which kinds of intangible property are eligible to be amortized. You will also learn how natural resource costs are recovered through depletion deductions. Finally, you will learn about the non-deductibility of start-up expenditures and their amortization.
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Petro Lisowsky, PhD, CPAAssociate Professor of Accountancy
College of Business: Department of Accountancy
Welcome back. In the last set of videos,
we discussed depreciation, which is one of
the three cost recovery methods outlined in the Internal Revenue Code.
Recall, the depreciation deals with deducting the cost of business use tangible,
personal, and real property.
Other than land, over a specified period of time.
In this set of videos we will look at amortization and depletion.
Amortization deals with deducting the cost of business use
intangible personal and real property.
While depletion deals with deducting the cost of natural resources over a period of time.
The core principle is the same under all three methods.
If we use an asset whose expected life is greater than one year,
then we need to capitalize it's cost and then recover it's cost over time.
Generally speaking, we cannot immediately expense the cost of
a long live asset although as we saw with depreciation some exceptions exist.
So let's dive into amortization.
Again, amortization is used to recover the cost of business use intangible assets.
The Internal Revenue Code sections applicable to
intangible assets or Section 197 and Section 195.
Section 197 identifies the types of intangible assets eligible for amortization,
while Section 195 discusses the amortization of start-up expenditures.
I'll discuss each in turn.
First, Section 197 intangibles are intangible assets that are acquired
or purchased from another party and used in a taxpayer's trade or business.
This category includes assets such as trademarks, trade names,
non-compete covenants, copyrights, patents,
licenses, goodwill, and the going-concern value of a firm.
Importantly, self-created intangibles are generally not amortizable.
For example, the soft drink company Coca-Cola has
one of the most valuable trademarks in the world.
It's built up and nurture over decades of
marketing and consumer satisfaction initiatives.
However, Coca-Cola has internally created this intangible trademark of Coca-Cola.
So technically, this trademark name is not an asset on
Coca-Cola's balance sheet and thus it is not amortizable.
However, Coca-Cola has purchased other companies and brands in the past like Minute Maid,
Odwalla Juice, Fuze Beverage, and Honest Tea.
To the extent, these acquired companies had special formulas,
patents, licenses, goodwill, and valuable trade names.
Coca-Cola would capitalize these intangibles on its balance sheet that
is record them as assets and then amortize these intangibles over time.
The nice thing about intangible assets is their amortized using
straight-line recovery over 180 months or 15 years,
beginning in the month the intangible asset is acquired.
And, we use 15 years regardless of the actual economic useful life of the intangible.
So, because this rule is rather rigid,
it makes the calculation quite easy.
Here, we actually ignore whether we think the trademark of
a certain acquired company is good for 10 years or if it's good for 20 years or 50 years,
we just amortize it over 15 years.
Now, there are a couple of exceptions here for patents and copyrights under Section 197.
These will actually be amortized differently depending on whether
the patent or copyright was purchased or self-created.
If it was purchased,
we amortize it like the other Section 197 intangibles.
Straight-line over 180 months or
15 years beginning in the month the intangible asset was acquired.
However, for internally created patents,
we will amortize them over 20 years,
while for internally created copyrights,
we can amortize them over the life of the author plus 70 years.
So a very, very long amortization period.
Another set of intangibles relates to
start-up expenses under Internal Revenue Code Section 195.
What are start-up expenditures?
Well, these are costs related to investigation and operating expenses,
but before the business actually begins operations.
That is their expenses incurred to start-up
the business but before the business is actually started up officially.
Interestingly, these are considered intangibles as
opposed to regular operating expenses because technically,
they are incurred before the business begins operations.
That is before the business has a tax return.
Once a business begins operations,
such operating expenses are simply deducted as ordinary and necessary business expenses.
So there's no issue there.
But before a business actually starts operations there are costs incurred.
But since technically, there is no business,
the costs are not immediately deductible.
Some examples of start-up expenditures that business owners need to keep track of
before starting their business including marketing survey costs,
advertising related to opening the business,
analyzing various facilities, training employees before the business starts,
travel and other expenses related to securing distributors,
suppliers or customers, and hiring personnel and outside consultants.
You can see that all of these expenses are the type that
are incurred before the business begins.
So, how do we account for them?
How do we deal with these expenses that are not deductible as
operating expenses since technically the business hasn't started its operations?
Well, businesses can immediately expense the first $5,000 of start-up expenses.
Then, any remaining amount over $5,000 that was spent for start-up purposes
can be amortized over 180 months beginning in the month the business begins operations.
However, there's a wrinkle here.
The $5,000 immediate expense is phased out or reduced
dollar-for-dollar when total start-up expenses exceed $50,000.
That is for every dollar that the total start-up expenses go over $50,000,
that's $1 less of the $5,000 that can be immediately deducted.
Here's an example. We have Fox Company that incurred
$51,000 of start-up expenses in the current year.
And it began operations in November of the current year.
So, what is the total deduction the Fox can claim related to the start-up expenses?
First, from a high-level,
what kinds of costs might be included in the $51,000?
Well, maybe Fox spent this money on surveying
a few possible retail locations before settling on one.
Maybe spending money on a few months rent on
the selected location before the business opened in November.
Maybe hiring and training some personnel.
And maybe advertising the opening of the new business.
So, what can Fox do in terms of claiming
an immediate deduction in amortizing these expenses?
Well, Fox would like to immediately expense $5,000.
However, it has incurred start-up expenses greater than $50,000.
It's incurred $51,000 of total start-up expenses.
Therefore, it must reduce the $5,000 immediate expense deduction,
dollar-for-dollar that exceeds $50,000.
Here, Fox can elect to immediately expense only $4,000 or the
$5,000 maximum amount eligible for expensing minus the phase out amount of $1,000.
Reflecting the fact that the $51,000 exceeds the $50,000 threshold by $1,000.
So for every dollar,
Fox incurred in start-up costs above the $50,000
threshold that's a dollar less of the $5,000 the Fox can immediately deduct.
Okay, so Fox immediately expenses $4,000,
but it had $51,000 in total start-up costs.
What amount can fox now amortize?
Well, out of the $51,000 total costs,
$4,000 is immediately deducted.
This leaves $47,000 that's eligible for amortization.
Fox will amortize this amount straight-line
over 180 months in the month it begins operations,
or starting in November.
So we take $47,000 and divide it by 180 and get $261.11 per month of amortization.
Since the business began operations in November of the current year and
assuming Fox will be a December 31 calendar year and taxpayer,
then we multiply the $261.11 by two months to obtain
the first tax years worth of amortization, or $522.22.
Note that in the next tax year,
Fox can claim an entire year's worth of amortization,
or $261.11 times 12 months,
and it can do so for the next 14 full years.
And then, in the last year,
technically the 16th tax year,
Fox will amortize $261.11 times 10 months to claim the remaining amortization deduction.
So in all, the total first year deductions related to
the start-up expenses or the $4,000
immediate deduction plus the two months worth of amortization,
for a total of $4,522.22.
A few last items relating to Section 195 intangibles,
to qualify for this expensing and amortization treatment,
the taxpayer must make an election on the business's first tax return.
That is, it's an election that the taxpayer has to affirmatively decide to do.
It's not automatic.
If a timely election is not made,
start-up expenses cannot be deducted.
Instead, they'll be capitalized and actually sit on
the company's balance sheet as an asset and not be amortized.
The only time the company would be able to deduct these costs is if the business ceases
operations and actually liquidates So of course,
not claiming the election is not an ideal situation since the business did
incur costs and then effectively has to wait to ever obtain any deductions.
So from a tax efficiency perspective,
it's more advantageous to make the selection to immediately
expense as much of the intangible cost as one can,
then amortize the rest over 15 years.
Then let the cost sit on the balance sheet on amortized as an asset.
In all, we've discussed the amortization of intangible assets.
Section 197 intangibles or amortizable when purchased.
Straight-line over 180 months beginning in the month of acquisition.
Only internally created patents and copyrights are also amortizable.
Section 195 allow start-up expenses to be immediately deductible up to
$5,000 subject to phase out if the total start-up expenditures exceed $50,000.
Any amount that is not immediately deducted would be eligible for
amortization straight-line over 180 months
starting in the month the business begins operations.
However, it's important that if the taxpayer desires
the immediate expense and amortization treatment of Section 195,
he or she must make the election on the business's first year tax return.
