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Amortize Intangible Assets - CPA Reg

  1. A corporation acquires a customer list for $270,000 as part of the acquisition of an ongoing business on September 1, Year 1. What is the Year 1 Section 197 amortization deduction?
    Answer: $6,000 Annual amortization = $270,000 / 15 = $18,000. Year 1 covers September, October, November, and December = 4 months. Year 1 deduction = $18,000 x (4/12) = $6,000. Option A is the full annual amount. Option C uses 3 months. Option D uses 6 months.
  2. A corporation acquires a business on July 1, Year 1, allocating the purchase price as follows: tangible assets $1,200,000; customer list $120,000; covenant not to compete $60,000; goodwill $420,000. What is the total amortization deduction for Year 1?
    Answer: $20,000 Total Section 197 intangibles = $120,000 + $60,000 + $420,000 = $600,000. Annual amortization = $600,000 / 15 = $40,000. Year 1 covers July through December = 6 months. Year 1 deduction = $40,000 x (6/12) = $20,000. Tangible assets are not Section 197 intangibles and are depreciated separately. Option A is the full annual amount without the partial-year adjustment. Option C uses 9 months. Option D uses 2 months.
  3. A company allocates $240,000 of a business acquisition price to an assembled workforce (workforce in place). The CPA questions whether this is a Section 197 intangible. Which analysis is most accurate?
    Answer: Workforce in place is expressly listed as a Section 197 intangible under IRC Section 197(d)(1)(C) and is amortized over 15 years using the straight-line method IRC Section 197(d)(1)(C) expressly includes 'work force in place including its composition and terms and conditions (contractual or otherwise) of its employment' as a Section 197 intangible. It is amortized over 15 years like all other Section 197 intangibles. Option A incorrectly denies Section 197 status. Option B fabricates an employee-count threshold. Option C incorrectly assigns a 10-year period.
  4. A corporation acquires goodwill for $600,000 in Year 1 and amortizes it over 15 years ($40,000 per year). In Year 6, the goodwill is sold for $750,000. Accumulated amortization after 5 full years is $200,000, producing an adjusted basis of $400,000. Which analysis of the gain and its character is most accurate?
    Answer: The $350,000 gain consists of $200,000 of Section 1245 ordinary income (recapture of amortization taken) and $150,000 of Section 1231 gain Total gain = $750,000 - $400,000 = $350,000. Section 1245 recapture applies to the extent of prior amortization deductions: $200,000 of ordinary income. The remaining $150,000 gain ($350,000 - $200,000) is Section 1231 gain, which qualifies for long-term capital gain treatment if Section 1231 produces a net gain. Options A and B treat the entire gain as capital without applying Section 1245. Option D treats all gain as ordinary, which would be correct only if amortization taken equaled or exceeded the total gain.
  5. Which of the following statements about Section 197 amortization is correct?
    Answer: Amortization begins in the month the intangible is acquired; the deduction for the year of acquisition is based on the number of months held during that year Section 197(a) specifies that amortization begins in the month of acquisition. For the year of acquisition, the deduction is prorated based on the number of months the asset was held. Option A is incorrect; amortization begins in the acquisition month, not the following year. Option C is incorrect; the straight-line method over 15 years is mandatory, not elective. Option D is incorrect; Section 197 overrides any shorter useful life - the 15-year period applies even if the asset has a shorter determinable economic life.
  6. Which of the following intangible assets is amortizable as a Section 197 intangible?
    Answer: A franchise agreement acquired as part of the purchase of an ongoing business A franchise agreement acquired in connection with the purchase of an ongoing business is expressly listed as a Section 197 intangible under IRC Section 197(d)(1)(F). Option A is incorrect; self-created intangibles generally do not qualify as Section 197 intangibles. Option B is incorrect; off-the-shelf software readily available to the public is specifically excluded from Section 197 under Section 197(e)(3). Option D is incorrect; interests under leases of tangible property are excluded from Section 197 under Section 197(e)(5).
  7. A corporation acquires a franchise agreement for $300,000 on July 1, Year 1, as part of a business acquisition. The franchise is for a contractual term of 10 years. How should the cost be amortized and what is the Year 1 deduction?
    Answer: Over 15 years under Section 197; Year 1 deduction $10,000 A franchise acquired in connection with a business acquisition is a Section 197 intangible amortized over 15 years regardless of its contractual term. Annual amortization = $300,000 / 15 = $20,000. Year 1 covers July through December = 6 months. Year 1 deduction = $20,000 x (6/12) = $10,000. Options A and B incorrectly use the contractual term. Option D is the full annual amount without the partial-year adjustment.
  8. Under Section 197, what is the primary purpose of the anti-churning rules?
    Answer: To prevent related-party transactions from converting pre-August 1993 intangibles that were not previously amortizable into Section 197 amortizable assets through tax-motivated transfers The anti-churning rules under Section 197(f)(9) prevent taxpayers from taking a pre-existing non-amortizable intangible (one acquired before August 10, 1993, when Section 197 was enacted) and converting it into an amortizable asset through a sale or transfer to a related party. Without this rule, taxpayers would have an incentive to sell pre-1993 intangibles to related parties solely to start a new 15-year amortization period. Options B, C, and D each describe rules that do not accurately describe the anti-churning provisions.
  9. Before acquiring a business, a company incurs $35,000 in investigative due diligence costs and $18,000 in transaction facilitation costs (broker fees, legal closing costs). The acquisition closes. Which analysis of these pre-acquisition costs is most accurate?
    Answer: Facilitating costs such as broker fees and legal closing costs must be capitalized; investigative due diligence costs incurred in pursuing a specific targeted acquisition are also capitalized; neither category is separately amortizable as a standalone Section 197 intangible Under Treasury Regulation Section 1.263(a)-5, costs that facilitate a business acquisition must be capitalized. Inherently facilitative costs such as broker fees and legal closing costs are always capitalized. Investigative costs are also capitalized when incurred to pursue a specific identified acquisition target - as the due diligence costs here are. Truly pre-decisional investigatory costs incurred before any specific target is identified may be deductible, but once the taxpayer has targeted a specific acquisition, investigation costs become facilitation costs subject to capitalization. Both categories are capitalized into the acquisition's cost basis and amortized as part of the acquired assets (including goodwill) rather than as standalone Section 197 intangibles. Answer C is correct. Option A incorrectly characterizes these as standalone Section 197 intangibles. Option B misclassifies the costs as Section 195 start-up costs. Option D incorrectly treats all costs as immediately deductible.
  10. A corporation purchases off-the-shelf antivirus software (readily available to the public) for $2,400. Which analysis of the tax treatment is most accurate?
    Answer: Off-the-shelf software is excluded from Section 197 and is depreciable under MACRS as 3-year property; small-dollar purchases may qualify as immediately deductible de minimis business expenses Off-the-shelf computer software that is not customized and is available to the general public is specifically excluded from Section 197 under Section 197(e)(3). Under MACRS, such software is 3-year property. For low-cost software, many businesses can deduct it as a de minimis business expense if it meets the threshold under Treasury Regulation Section 1.263(a)-1(f). Option A incorrectly classifies the software as Section 197. Option C applies the 36-month rule that pertains to proprietary non-off-the-shelf software, not off-the-shelf software. Option D is incorrect; regular MACRS applies in addition to Section 179 eligibility.
  11. A startup corporation incurs $80,000 of organizational costs before incorporating. Under Section 248, which analysis of the deductibility of these costs is most accurate?
    Answer: The corporation may deduct up to $5,000 immediately, but since costs exceed $50,000 by $30,000, the immediate deduction is fully phased out; all $80,000 is amortized over 180 months beginning when the corporation commences business Under Section 248, a corporation may deduct up to $5,000 of organizational costs immediately. This amount is reduced dollar-for-dollar by the amount costs exceed $50,000. Here: $80,000 - $50,000 = $30,000 excess; immediate deduction = $5,000 - $30,000 = $0 (phased out). All $80,000 is amortized over 180 months beginning with the month the corporation begins business. Option A invents a 5-year amortization period. Option C incorrectly classifies organizational costs as Section 197 intangibles. Option D confuses organizational costs (Section 248) with start-up costs (Section 195).
  12. A company acquires a covenant not to compete for $180,000 when purchasing a business on March 1, Year 1. The covenant covers a contractual term of 3 years. What is the Year 1 amortization deduction?
    Answer: $10,000 The covenant not to compete is a Section 197 intangible (acquired in connection with a business acquisition), amortized over 15 years regardless of the contractual 3-year term. Annual amortization = $180,000 / 15 = $12,000. Year 1 covers March through December = 10 months. Year 1 deduction = $12,000 x (10/12) = $10,000. Option B is the full annual deduction without the partial-year adjustment. Option C amortizes over 3 years (the contractual term), which is incorrect. Option D uses only half a year.
  13. A corporation acquires the following intangibles as part of a business purchase on January 1, Year 1: goodwill $360,000, workforce in place $90,000, and a government-issued license $150,000. What is the total Year 1 amortization deduction for these Section 197 intangibles?
    Answer: $40,000 Total Section 197 intangibles = $360,000 + $90,000 + $150,000 = $600,000. Annual amortization = $600,000 / 15 = $40,000. The acquisition was January 1, so the full calendar year is available - 12 months of amortization. Year 1 deduction = $40,000. Option B applies 13.5 months. Option C applies a 20-year period. Option D applies a 10-year period.
  14. Under Section 197, intangible assets acquired in connection with a business acquisition are amortized over which period and using which method?
    Answer: 15 years (180 months) using the straight-line method, beginning with the month of acquisition IRC Section 197(a) requires amortization of Section 197 intangibles over 15 years (180 months) using the straight-line method beginning in the month of acquisition. All Section 197 intangibles use the same 15-year period regardless of actual useful life. Option B is incorrect; the taxpayer's estimate of useful life is irrelevant. Option C is incorrect; goodwill and all other Section 197 intangibles use the same 15-year period. Option D invents category-specific periods that do not exist in Section 197.
  15. A corporation disposes of one Section 197 intangible from a business acquisition for $25,000 when its adjusted basis is $40,000, a $15,000 loss. Several other Section 197 intangibles from the same acquisition are still held. Which analysis of the loss is most accurate?
    Answer: No loss is recognized; under Section 197(f)(1), the unrecognized loss basis is reallocated proportionally to the other Section 197 intangibles from the same acquisition that are still held Section 197(f)(1) prevents recognition of a loss on the disposition of a Section 197 intangible when other Section 197 intangibles from the same acquisition bundle are still held. The rationale is that the individual intangibles were part of a bundle purchase and their individual values are interdependent. Instead of recognizing the loss, the unrecognized loss basis is added to the adjusted bases of the remaining Section 197 intangibles from the same acquisition. Options A and B allow current-year loss recognition contrary to Section 197(f)(1). Option C incorrectly defers the loss to a future year rather than reallocating the basis.
  16. A corporation acquires goodwill for $450,000 as part of a business acquisition on May 1, Year 1. What is the Year 2 amortization deduction for the goodwill?
    Answer: $30,000 Annual amortization = $450,000 / 15 = $30,000. Year 2 is a full calendar year, so the deduction is the full $30,000. The partial-year calculation only applies to Year 1 (the acquisition year). For Year 2 and all subsequent full years, the deduction is $30,000. Option A applies an 8-month partial year to Year 2, which is incorrect. Option B uses an incorrect calculation. Option D applies a 10-year period.
  17. A self-employed consultant develops a proprietary client list through years of personal business development. The list has no separately identifiable cost basis. Can the consultant amortize this client list under Section 197?
    Answer: No; Section 197 does not apply to self-created intangibles; only intangibles acquired from another party in connection with a trade or business qualify Section 197(c)(2) excludes self-created intangibles from Section 197 amortization. Only intangibles that are acquired (not created by the taxpayer) in connection with carrying on a trade or business qualify. Since the client list was developed internally, it has no tax basis and cannot be amortized. Option A incorrectly allows Section 197 for self-created intangibles. Option C has no basis in the tax code. Option D is incorrect in the other direction - client lists acquired from another party as part of a business acquisition do qualify for Section 197.
  18. A company acquires a patent with 8 years of remaining legal life as part of the purchase of an ongoing business, paying $300,000 for it. How must the patent be amortized?
    Answer: Over 15 years using the straight-line method as a Section 197 intangible A patent acquired in connection with a business acquisition is a Section 197 intangible under Section 197(d)(1)(C). It must be amortized over 15 years regardless of its remaining legal life. The actual remaining legal life (8 years) is irrelevant for tax purposes once the asset is classified as a Section 197 intangible. Option A uses the remaining legal life, which applies to separately acquired patents (not acquired as part of a business). Option B invents a lesser-of rule that does not apply to Section 197. Option C uses the original patent life.
  19. A company disposes of a Section 197 intangible at a gain. The asset had an original cost of $150,000, accumulated amortization of $50,000, an adjusted basis of $100,000, and was sold for $175,000. What is the character of the gain?
    Answer: Under Section 1245, $50,000 of the gain is ordinary income (recapture of amortization) and $25,000 is Section 1231 gain Section 1245 recapture rules apply to Section 197 intangibles. Ordinary income is recognized to the extent of amortization deductions previously taken ($50,000). The remaining gain of $25,000 ($75,000 total gain - $50,000 recapture) is Section 1231 gain, eligible for long-term capital gain rates if the Section 1231 netting rules produce a net gain. Options A and B characterize the entire gain as capital without applying Section 1245. Option C overstates the ordinary income by ignoring the Section 1231 component.
  20. A sole proprietor incurs $50,000 of start-up costs and opens the new business on January 1, Year 1. Under Section 195, what is the total Year 1 deduction for start-up costs?
    Answer: $8,000 Under Section 195, up to $5,000 of start-up costs may be deducted immediately, reduced dollar-for-dollar by the amount by which start-up costs exceed $50,000. Since costs are exactly $50,000 (no excess), the full $5,000 immediate deduction is available. The remaining $45,000 is amortized over 180 months starting January 1. Year 1 amortization = $45,000 / 180 x 12 months = $3,000. Total Year 1 deduction = $5,000 + $3,000 = $8,000. Option B is only the immediate deduction. Option C expenses all costs immediately. Option D is only the amortization portion.

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