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
40 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.
與講師見面
Matthew HutchensLecturer of Accountancy
Department of Accountancy
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 its cost and then recover its cost over time.
Generally speaking, we cannot immediately expense the cost of a long-lived 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.
Internal Revenue Code Sections applicable to
intangible assets are section 197 and section 195.
Section 197 identifies the types of intangible assets eligible for amortization,
while section 195 discusses the amortization of startup 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 trainer 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 nurtured 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 that they're amortized using
straight-line recovery over 180 months or 15 years,
beginning in the month the intangible asset is acquired.
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 a 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 startup expenses
under Internal Revenue Code section 195.
What are startup expenditures?
Well, these are costs related to investigation and operating expenses,
but before the business actually begins operations.
That is, the expenses incurred to start up the business,
but before the business has 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 startup expenditures that business owners need to keep track of
before starting their business include; 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 it's operations?
Well, businesses can immediately expense the first $5,000 of startup expenses.
Then, any remaining amount over $5,000 that was spent for startup 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 startup expenses exceed $50,000.
That is, for every dollar that the total startup expenses go over $50,000,
that's one dollar less of the $5,000 that can be immediately deducted.
Here's an example. We have Fox Company that incurred
$51,000 of startup 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 startup 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.
It may be advertising the opening of the new business.
So, what can Fox do in terms of claiming
an immediate deduction and amortizing these expenses?
We'll, Fox would like to immediately expense $5,000.
However, it has incurred startup expenses greater than $50,000.
It's incurred $51,000 of total startup 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 $100,000,
reflecting the fact that the $51,000 exceeds the $50,000 threshold by $1000.
So, for every dollar Fox incurred in startup costs above the $50,000 threshold,
that's a dollar less of the $5,000 the Fox can immediately deduct.
So, Fox immediately expense it's $4,000.
But it had $51,000 in total startup costs.
What amount can Fox now amortize?
Well, out of the $51,000 total cost,
$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.
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 startup 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 businesses first tax return.
If a timely election is not made,
startup 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 costs as one can,
then amortize the rest over 15 years.
Then, let the costs sit on the balance sheet unamortized as an asset.
In all, we've discussed the amortization of intangible assets.
Section 197 intangibles are 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 startup expenses to be immediately deductible up to
$5,000 subject to phase out if the total startup 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 105,
he or she must make the election on the business's first year tax return.
