CPA Quiz: Amortize Intangible Assets
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Amortize Intangible AssetsQuestion 1 of 20

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
$20,000
$30,000
$8,000
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CPA Quiz: Amortize Intangible Assets

Practice Amortize Intangible Assets in CPA with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

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This quiz focuses on Amortize Intangible Assets, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA.

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Question 1

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?

  1. $40,000
  2. $20,000 (correct answer)
  3. $30,000
  4. $8,000
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.

Question 2

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. $6,000
  2. $3,000
  3. $1,500 (correct answer)
  4. $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.

Question 3

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?

  1. Over 15 years as a Section 197 intangible
  2. Over 5 years as 5-year MACRS property
  3. Expensed immediately in the year of acquisition
  4. Over 36 months using the straight-line method beginning in the month of acquisition (correct answer)
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.

Question 4

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?

  1. $18,000
  2. $6,000 (correct answer)
  3. $4,500
  4. $9,000
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.

Question 5

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?

  1. Yes; client lists are Section 197 intangibles regardless of how they were created
  2. No; Section 197 does not apply to self-created intangibles; only intangibles acquired from another party in connection with a trade or business qualify (correct answer)
  3. Yes; but at 50% of the normal amortization rate as a penalty for not purchasing the asset at arm's length
  4. No; client lists are never amortizable regardless of how they were acquired
Explanation: 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.

Question 6

A corporation acquires goodwill for 600,000inYear1andamortizesitover15years(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?

  1. The $350,000 gain is entirely capital gain because goodwill is a capital asset
  2. The $350,000 gain is entirely Section 1231 gain eligible for preferential capital gain rates
  3. The $350,000 gain consists of $200,000 of Section 1245 ordinary income (recapture of amortization taken) and $150,000 of Section 1231 gain (correct answer)
  4. The entire $350,000 gain is Section 1245 ordinary income because all Section 197 dispositions are fully recaptured
Explanation: 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 150,000gain(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.

Question 7

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?

  1. Workforce in place is not a Section 197 intangible; it must be amortized based on estimated employee tenure
  2. Workforce in place qualifies as a Section 197 intangible only if the workforce includes more than 50 employees
  3. Workforce in place is a Section 197 intangible but is amortized over 10 years because it involves human capital
  4. 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 (correct answer)
Explanation: 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.

Question 8

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?

  1. All $53,000 qualifies as Section 197 amortizable intangibles attributable to the acquisition
  2. All $53,000 qualifies as start-up costs deductible under Section 195
  3. 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 (correct answer)
  4. All $53,000 is immediately deductible as ordinary and necessary business expenses
Explanation: 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.

Question 9

An acquirer considers making a Section 338(h)(10) election when purchasing a target corporation's stock. One cited benefit is access to Section 197 amortization of goodwill and other intangibles. Which analysis of this benefit is most accurate?

  1. Section 197 amortization is available only in actual asset purchases, not deemed asset sales resulting from a Section 338(h)(10) election
  2. Goodwill receives the same tax treatment regardless of whether the deal is structured as an asset purchase or a stock purchase
  3. A Section 338(h)(10) election allows the acquirer to obtain a stepped-up basis in all acquired assets, including intangibles, enabling Section 197 amortization of goodwill that would not be available in a plain stock acquisition (correct answer)
  4. A Section 338(h)(10) election always produces a better combined after-tax result for both buyer and seller compared to a stock purchase without the election
Explanation: In a straight stock acquisition without a Section 338(h)(10) election, the acquirer takes a carryover basis in the target's assets, and no goodwill step-up or new Section 197 amortization is available. A Section 338(h)(10) election treats the transaction as a deemed asset sale, giving the acquirer a stepped-up basis in all of the target's assets (including intangibles and goodwill) equal to the purchase price allocation. This enables Section 197 amortization of the full allocated goodwill and other intangibles. Option A is incorrect; deemed asset sales qualify for Section 197 the same as actual asset sales. Option B is incorrect; the treatment differs significantly. Option D overstates the election's benefit; the seller often bears higher tax cost from the deemed asset sale.

Question 10

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?

  1. The $15,000 loss is deductible in the current year as a capital loss
  2. The $15,000 loss is deductible in the current year as an ordinary loss
  3. The $15,000 loss is deductible only in the year the final Section 197 intangible from that acquisition is disposed of
  4. 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 (correct answer)
Explanation: 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.

Question 11

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?

  1. $40,000 (correct answer)
  2. $36,000
  3. $30,000
  4. $60,000
Explanation: 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.

Question 12

A company purchases a business and allocates $120,000 to a 3-year covenant not to compete and $180,000 to goodwill. The tax advisor recommends maximizing the allocation to the covenant since it expires in 3 years and should be deductible over that shorter period. Which analysis of this recommendation is most accurate?

  1. The recommendation is flawed; a covenant not to compete entered into in connection with a business acquisition is a Section 197 intangible amortized over 15 years regardless of its contractual term, so reallocating between the covenant and goodwill produces no difference in deduction timing (correct answer)
  2. The recommendation is sound if the parties document the covenant's independent economic value in the purchase agreement
  3. The recommendation is sound; covenants not to compete are amortized over their contractual term, producing faster deductions than the 15-year goodwill period
  4. The recommendation is partially correct; covenants with terms shorter than 5 years qualify for amortization over their actual contractual term under a special exception
Explanation: A covenant not to compete entered into in connection with a business acquisition is a Section 197 intangible under Section 197(d)(1)(E). Like all Section 197 intangibles, it must be amortized over 15 years regardless of the contractual period. Since goodwill is also a Section 197 intangible with a 15-year life, shifting the purchase price allocation between the covenant and goodwill produces no difference in the timing or total amount of amortization deductions. The advisor's strategy would have been effective under pre-1993 law but is ineffective under Section 197. Options B, C, and D incorrectly suggest the covenant's contractual term controls amortization.

Question 13

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?

  1. Over 10 years (contractual term); Year 1 deduction $15,000
  2. Over the lesser of 15 years or 10 years (contractual term); Year 1 deduction $15,000
  3. Over 15 years under Section 197; Year 1 deduction $10,000 (correct answer)
  4. Over 15 years under Section 197; Year 1 deduction $20,000
Explanation: 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.

Question 14

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?

  1. The entire $75,000 gain is long-term capital gain because intangibles are capital assets
  2. The entire $75,000 gain is Section 1231 gain eligible for capital gain treatment
  3. The entire $75,000 gain is ordinary income because Section 197 intangibles are subject to full recapture
  4. Under Section 1245, $50,000 of the gain is ordinary income (recapture of amortization) and $25,000 is Section 1231 gain (correct answer)
Explanation: 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(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.

Question 15

Which of the following intangible assets is amortizable as a Section 197 intangible?

  1. A patent created internally by the taxpayer's own research and development team
  2. Off-the-shelf computer software purchased separately and readily available to the general public
  3. A franchise agreement acquired as part of the purchase of an ongoing business (correct answer)
  4. A short-term operating lease on commercial office space
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).

Question 16

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?

  1. $8,000 (correct answer)
  2. $5,000
  3. $50,000
  4. $3,000
Explanation: 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.

Question 17

Under Section 197, intangible assets acquired in connection with a business acquisition are amortized over which period and using which method?

  1. 15 years (180 months) using the straight-line method, beginning with the month of acquisition (correct answer)
  2. The asset's estimated useful life using the straight-line method
  3. 40 years for goodwill and 15 years for all other Section 197 intangibles
  4. 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.

Question 18

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. $1,500 per month
  2. $750 per month
  3. $900 per month
  4. $1,000 per month (correct answer)
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.

Question 19

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?

  1. Over 8 years (remaining legal life) using the straight-line method
  2. Over the lesser of 15 years or the remaining legal life of the patent
  3. Over 17 years (original patent protection period) using straight-line
  4. Over 15 years using the straight-line method as a Section 197 intangible (correct answer)
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.

Question 20

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?

  1. $10,000 (correct answer)
  2. $12,000
  3. $60,000
  4. $6,000
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.