Page 91 - Small Business Taxes

16:31 - 2-Feb-2023
Page 32 of 57
Fileid: … tions/p535/2022/a/xml/cycle01/source
The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
You can't amortize any of the intangi- Accounts receivable or other similar rights to Assets That Aren't Section
! bles listed in items 1 through 8 that you income for goods or services provided to cus- 197 Intangibles
CAUTION created rather than acquired unless tomers before the acquisition of a trade or busi-
you created them in acquiring assets that make ness aren't section 197 intangibles.
up a trade or business or a substantial part of a The following assets aren't section 197 intangi-
trade or business. Supplier-based intangible. A supplier-based bles.
intangible is the value resulting from the future 1. Any interest in a corporation, partnership,
Goodwill. This is the value of a trade or busi- acquisitions (through contract or other relation- trust, or estate.
ness based on expected continued customer ships with suppliers in the ordinary course of 2. Any interest under an existing futures con-
patronage due to its name, reputation, or any business) of goods or services that you will sell tract, foreign currency contract, notional
other factor. or use. The amount you pay or incur for sup-
plier-based intangibles includes, for example, principal contract, interest rate swap, or
Going concern value. This is the additional any portion of the purchase price of an acquired similar financial contract.
value of a trade or business that attaches to trade or business that is attributable to the exis- 3. Any interest in land.
property because the property is an integral tence of a favorable relationship with persons 4. Most computer software. (See Computer
part of an ongoing business activity. It includes providing distribution services (such as a favor- software, later.)
value based on the ability of a business to con- able shelf or display space or a retail outlet), or
tinue to function and generate income even the existence of favorable supply contracts. 5. Any of the following assets not acquired in
though there is a change in ownership (but Don't include any amount required to be paid connection with the acquisition of a trade
doesn't include any other section 197 intangi- for the goods or services to honor the terms of or business or a substantial part of a trade
ble). It also includes value based on the imme- the agreement or other relationship. Also, see or business.
diate use or availability of an acquired trade or Assets That Aren't Section 197 Intangibles, a. An interest in a film, sound recording,
business, such as the use of earnings during later. videotape, book, or similar property.
any period in which the business wouldn't other-
wise be available or operational. Government-granted license, permit, etc. b. A right to receive tangible property or
This is any right granted by a governmental unit services under a contract or from a
Workforce in place, etc. This includes the or an agency or instrumentality of a governmen- governmental agency.
composition of a workforce (for example, its ex- tal unit. For example, you must amortize the
perience, education, or training). It also includes capitalized costs of acquiring (including issuing c. An interest in a patent or copyright.
the terms and conditions of employment, or renewing) a liquor license, a taxicab medal- d. Certain rights that have a fixed dura-
whether contractual or otherwise, and any other lion or license, or a television or radio broad- tion or amount. (See Rights of fixed
value placed on employees or any of their at- casting license. duration or amount, later.)
tributes.
For example, you must amortize the part of Covenant not to compete. Section 197 intan- 6. An interest under either of the following.
gibles include a covenant not to compete (or
the purchase price of a business that is for the similar arrangement) entered into in connection a. An existing lease or sublease of tangi-
existence of a highly skilled workforce. Also, with the acquisition of an interest in a trade or ble property.
you must amortize the cost of acquiring an ex- business, or a substantial portion of a trade or b. A debt that was in existence when the
isting employment contract or relationship with business. An interest in a trade or business in- interest was acquired.
employees or consultants. cludes an interest in a partnership or a corpora-
Business books and records, etc. This in- tion engaged in a trade or business. 7. A right to service residential mortgages
unless the right is acquired in connection
cludes the intangible value of technical man- An arrangement that requires the former with the acquisition of a trade or business
uals, training manuals or programs, data files, owner to perform services (or to provide prop- or a substantial part of a trade or business.
and accounting or inventory control systems. It erty or the use of property) isn't similar to a cov- 8. Certain transaction costs incurred by par-
also includes the cost of customer lists; sub- enant not to compete to the extent the amount
scription lists; insurance expirations; patient or paid under the arrangement represents reason- ties to a corporate organization or reorgan-
ization in which any part of a gain or loss
client files; and lists of newspaper, magazine, able compensation for those services or for that
radio, and television advertisers. property or its use. isn't recognized.
Intangible property that isn't amortizable un-
Patents, copyrights, etc. This includes pack- Franchise, trademark, or trade name. A der the rules for section 197 intangibles can be
age design, computer software, and any inter- franchise, trademark, or trade name is a section depreciated if it meets certain requirements.
est in a film, sound recording, videotape, book, 197 intangible. You must amortize its purchase You must generally use the straight line method
or other similar property, except as discussed or renewal costs, other than certain contingent over its useful life. For certain intangibles, the
later under Assets That Aren't Section 197 In- payments that you can deduct currently. For in- depreciation period is specified in the law and
tangibles. formation on currently deductible contingent regulations. For example, the depreciation pe-
payments, see chapter 11. riod for computer software that isn't a section
Customer-based intangible. This is the Professional sports franchise. A fran- 197 intangible is generally 36 months.
composition of market, market share, and any chise engaged in professional sports and any
other value resulting from the future provision of intangible assets acquired in connection with For more information on depreciating intan-
goods or services because of relationships with acquiring the franchise (including player con- gible property, see Intangible Property under
customers in the ordinary course of business. tracts) is a section 197 intangible amortizable What Method Can You Use To Depreciate Your
For example, you must amortize the part of the over a 15-year period. Property? in chapter 1 of Pub. 946.
purchase price of a business that is for the exis-
tence of the following intangibles. Contract for the use of, or a term interest in, Computer software. Section 197 intangibles
• A customer base. a section 197 intangible. Section 197 intan- don’t include the following types of computer
• A circulation base. gibles include any right under a license, con- software.
• An undeveloped market or market growth. tract, or other arrangement providing for the use
• Insurance in force. of any section 197 intangible. It also includes 1. Software that meets all the following re-
• A mortgage servicing contract. any term interest in any section 197 intangible, quirements.
• An investment management contract. whether the interest is outright or in trust. a. It is, or has been, readily available for
• Any other relationship with customers in- purchase by the general public.
volving the future provision of goods or
services. b. It is subject to a nonexclusive license.

Page 32 Chapter 8 Amortization