In tax law, amortization refers to the cost recovery system for intangible property. Although the theory behind cost recovery deductions of amortization is to deduct from basis in a systematic manner over an asset's estimated useful economic life so as to reflect its consumption, expiration, obsolescence or other decline in value as a result of use or the passage of time, many times a perfect match of income and deductions does not occur for policy reasons.
A corresponding concept for tangible assets is depreciation. Methodologies for allocating amortization to each tax period are generally the same as for depreciation. However, many intangible assets such as goodwill or certain brands may be deemed to have an indefinite useful life, or “self-created” and are therefore not subject to amortization.[1]
In the United States of Americaedit
The United States Congress gives taxpayers larger deductions in the early years of an asset’s useful life.
Intangible propertyedit
Intangible property which is subject to amortization is described in 26 U.S.C. §§ 197(c)(1) and 197(d) and must be property held either for use in a trade, business, or for the production of income. Before 1993, the United States Tax Code did not contain provisions for cost recovery of intangible assets; rather, the intangible assets were depreciated under the current provisions for depreciation of tangible assets, 26 U.S.C. §§ 167 and 168. However, the problem before 1993 was that many intangible assets did not meet the burdensome requirements of §§ 167 and 168 because intangible assets can not necessarily be subject to “wear and tear”. This led to taxpayers having the incentive to ignore any basis in the intangible asset until it was sold.
Under §197 most acquired intangible assets are to be amortized ratably over a fifteen-year period.[2] This is not the best treatment of an intangible whose actual life is much shorter than fifteen years. Furthermore, if an intangible is not eligible for amortization under § 197, the taxpayer can depreciate the asset if there is a showing of the assets useful life.[3]
Startup expenditureedit
Startup expenditures are defined as investigatory expenses incurred prior to commencing a trade or business activity which would have been deducted had they been paid or incurred when the taxpayer was already engaged in the trade or business activity.
Unlike other sections in the tax code which do not allow current deductions for most startup expenses, section 195 allows a taxpayer to amortize start-up expenditures over a 180-month period.[4] The policy behind this provision is to encourage taxpayers to explore new business ventures.
Samuel A. Donaldson. Federal Income Taxation of Individuals: Cases Problems, and Materials. 2nd ed. 2007.
April 11, 2024
amortization, amortization, refers, cost, recovery, system, intangible, property, although, theory, behind, cost, recovery, deductions, amortization, deduct, from, basis, systematic, manner, over, asset, estimated, useful, economic, life, reflect, consumption,. In tax law amortization refers to the cost recovery system for intangible property Although the theory behind cost recovery deductions of amortization is to deduct from basis in a systematic manner over an asset s estimated useful economic life so as to reflect its consumption expiration obsolescence or other decline in value as a result of use or the passage of time many times a perfect match of income and deductions does not occur for policy reasons Contents 1 Depreciation 2 In the United States of America 2 1 Intangible property 2 2 Startup expenditure 3 See also 4 References 5 SourcesDepreciation editA corresponding concept for tangible assets is depreciation Methodologies for allocating amortization to each tax period are generally the same as for depreciation However many intangible assets such as goodwill or certain brands may be deemed to have an indefinite useful life or self created and are therefore not subject to amortization 1 In the United States of America editThe United States Congress gives taxpayers larger deductions in the early years of an asset s useful life Intangible property edit Intangible property which is subject to amortization is described in 26 U S C 197 c 1 and 197 d and must be property held either for use in a trade business or for the production of income Before 1993 the United States Tax Code did not contain provisions for cost recovery of intangible assets rather the intangible assets were depreciated under the current provisions for depreciation of tangible assets 26 U S C 167 and 168 However the problem before 1993 was that many intangible assets did not meet the burdensome requirements of 167 and 168 because intangible assets can not necessarily be subject to wear and tear This led to taxpayers having the incentive to ignore any basis in the intangible asset until it was sold Under 197 most acquired intangible assets are to be amortized ratably over a fifteen year period 2 This is not the best treatment of an intangible whose actual life is much shorter than fifteen years Furthermore if an intangible is not eligible for amortization under 197 the taxpayer can depreciate the asset if there is a showing of the assets useful life 3 Startup expenditure edit Startup expenditures are defined as investigatory expenses incurred prior to commencing a trade or business activity which would have been deducted had they been paid or incurred when the taxpayer was already engaged in the trade or business activity Unlike other sections in the tax code which do not allow current deductions for most startup expenses section 195 allows a taxpayer to amortize start up expenditures over a 180 month period 4 The policy behind this provision is to encourage taxpayers to explore new business ventures See also editWriting down allowanceReferences edit House Report No 103 111 103rd Congress 25 May 1993 House Report No 103 111 Treasury Regulation 1 167 a 3 26 U S C 195 Sources editSamuel A Donaldson Federal Income Taxation of Individuals Cases Problems and Materials 2nd ed 2007 Retrieved from https en wikipedia org w index php title Amortization tax law amp oldid 869899635, wikipedia, wiki, book, books, library,
