Amortization

Certain capital expenditures can be deducted over a term of years. This is called amortization. This deduction is taken evenly over a prescribed period of time. Amortization generally applies to the following expenditures:

  • Intangibles acquired on the purchase of a business
  • Business start-up costs and organizational expenses
  • Construction period interest and taxes
  • Research and experimentation costs
  • Bond premiums
  • Reforestation costs
  • Pollution control facilities
  • Costs of acquiring a lease
  • Certain leasehold and qualified restaurant improvements

Intangibles Acquired on the Purchase of a Business

If you buy a business, a portion of your cost may be allocated to certain intangible items:

  • Goodwill
  • Going concern value
  • Workforce in place
  • Patents, copyrights, formulas, processes, designs, patterns, and know-how
  • Customer-based intangibles
  • Supplier-based intangibles
  • Licenses, permits, and other rights granted by a governmental unit or agency
  • Covenants not to compete
  • Trademarks, or trade names
  • Franchises (including sports franchises) (but ongoing franchise fees are currently deductible)

These items are called Section 197 intangibles, named after a section in the Internal Revenue Code. You may deduct the portion of the cost allocated to these items ratably over a period of 15 years.

Example
You buy out the accounting practice of someone else. As part of the sale, the other accountant signs a covenant not to compete with you for 2 years within your same location. You may amortize ...

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