Amortize Intangible Assets
Help Questions
CPA Regulation (REG) › Amortize Intangible Assets
Under Section 197, intangible assets acquired in connection with a business acquisition are amortized over which period and using which method?
The asset's estimated useful life using the straight-line method
15 years (180 months) using the straight-line method, beginning with the month of acquisition
40 years for goodwill and 15 years for all other Section 197 intangibles
5 years for customer-based intangibles and 15 years for goodwill
Explanation
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.
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?
$40,000
$8,000
$30,000
$20,000
Explanation
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.
Which of the following intangible assets is amortizable as a Section 197 intangible?
A short-term operating lease on commercial office space
A franchise agreement acquired as part of the purchase of an ongoing business
Off-the-shelf computer software purchased separately and readily available to the general public
A patent created internally by the taxpayer's own research and development team
Explanation
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).
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?
Over 17 years (original patent protection period) using straight-line
Over the lesser of 15 years or the remaining legal life of the patent
Over 8 years (remaining legal life) using the straight-line method
Over 15 years using the straight-line method as a Section 197 intangible
Explanation
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.
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?
$12,000
$10,000
$6,000
$60,000
Explanation
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.
A corporation acquires computer software valued at $90,000 as part of the purchase of an ongoing business on October 1, Year 1. Because it was acquired as part of a business acquisition, it is treated as a Section 197 intangible. What is the Year 1 amortization deduction?
$1,500
$3,000
$6,000
$4,500
Explanation
Annual amortization = $90,000 / 15 = $6,000. Year 1 covers October, November, and December = 3 months. Year 1 deduction = $6,000 x (3/12) = $1,500. Option A is the full annual amount. Option B is 6 months. Option D is 9 months.
A corporation pays $120,000 for computer software that is purchased separately (not as part of a business acquisition) and is proprietary, non-off-the-shelf software. How must this software be amortized for tax purposes?
Over 36 months using the straight-line method beginning in the month of acquisition
Expensed immediately in the year of acquisition
Over 5 years as 5-year MACRS property
Over 15 years as a Section 197 intangible
Explanation
Computer software that is acquired separately (not as part of a business acquisition) is excluded from Section 197 under Section 197(e)(3) if it is not of a type that generally is available to the public. Under Rev. Proc. 2000-50, such separately acquired software is amortized over 36 months using the straight-line method beginning in the month placed in service. Option A is incorrect; this software is excluded from Section 197. Option B incorrectly applies 5-year MACRS. Option C would require the software to qualify for Section 179 or bonus depreciation.
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?
$18,000
$9,000
$6,000
$4,500
Explanation
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.
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?
$30,000
$22,500
$45,000
$28,000
Explanation
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.
A taxpayer purchases a trademark for $180,000 on April 1, Year 1, as part of a business acquisition. The trademark has no fixed legal life. What is the monthly amortization amount under Section 197?
$1,000 per month
$750 per month
$1,500 per month
$900 per month
Explanation
Monthly amortization = Cost / 180 months = $180,000 / 180 = $1,000 per month. Section 197 requires straight-line amortization over exactly 180 months regardless of whether the asset has a fixed or indefinite life. Option A applies a 10-year (120-month) period. Option B applies a 20-year (240-month) period. Option C applies a 200-month period.