Page 93 - Small Business Taxes

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Gain-recognition exception. This exception Changing Your Accounting Method tions) as other section 197 intangibles you still
to the anti-churning rules applies if the person have. Instead, increase the adjusted basis of
you acquired the intangible from (the transferor) Generally, you must get IRS approval to change each remaining amortizable section 197 intangi-
meets both of the following requirements. your method of accounting. File Form 3115 to ble by a proportionate part of the nondeductible
• That person wouldn't be related to you (as request a change to a permissible method of loss. Figure the increase by multiplying the non-
described under Related person, earlier) if accounting for amortization. deductible loss on the disposition of the intangi-
the 20% test for ownership of stock and ble by the following fraction.
partnership interests were replaced by a The following are examples of a change in • The numerator is the adjusted basis of
50% test. method of accounting for amortization. each remaining intangible on the date of
• That person chose to recognize gain on • A change in the amortization method, pe- the disposition.
the disposition of the intangible and pay in- riod of recovery, or convention of an amor- • The denominator is the total adjusted basis
come tax on the gain at the highest tax tizable asset. of all remaining amortizable section 197 in-
rate. See chapter 2 of Pub. 544 for infor- • A change in the accounting for amortizable tangibles on the date of the disposition.
mation on making this choice. assets from a single asset account to a
If this exception applies, the anti-churning multiple asset account (pooling), or vice Covenant not to compete. A covenant not to
rules apply only to the amount of your adjusted versa. compete, or similar arrangement, isn't consid-
ered disposed of or worthless before you dis-
basis in the intangible that is more than the gain • A change in the accounting for amortizable
recognized by the transferor. assets from one type of multiple asset ac- pose of your entire interest in the trade or busi-
ness for which you entered into the covenant.
Notification. If the person you acquired count to a different type of multiple asset
account.
the intangible from chooses to recognize gain Nonrecognition transfers. If you acquire a
under the rules for this exception, that person Changes in amortization that aren't a section 197 intangible in a nonrecognition trans-
must notify you in writing by the due date of the change in method of accounting include the fol- fer, you are treated as the transferor with re-
return on which the choice is made. lowing. spect to the part of your adjusted basis in the in-
tangible that isn't more than the transferor's
Anti-abuse rule. You can't amortize any sec- • A change in figuring amortization in the tax adjusted basis. You amortize this part of the ad-
year in which your use of the asset
tion 197 intangible acquired in a transaction for changes. justed basis over the intangible's remaining am-
which the principal purpose was either of the • An adjustment in the useful life of an amor- ortization period in the hands of the transferor.
following. tizable asset. Nonrecognition transfers include transfers to a
• To avoid the requirement that the intangi- • Generally, the making of a late amortiza- corporation, partnership contributions and dis-
ble be acquired after August 10, 1993. tion election or the revocation of a timely tributions, like-kind exchanges, and involuntary
• To avoid any of the anti-churning rules. valid amortization election. conversions.
In a like-kind exchange or involuntary con-
More information. For more information • Any change in the placed-in-service date version of a section 197 intangible, you must
about the anti-churning rules, including addi- of an amortizable asset. continue to amortize the part of your adjusted
tional rules for partnerships, see Regulations basis in the acquired intangible that isn't more
section 1.197-2(h). See Regulations section 1.446-1(e)(2)(ii)(a) than your adjusted basis in the exchanged or
for more information and examples. converted intangible over the remaining amorti-
Incorrect Amount of Automatic approval. In some instances, you zation period of the exchanged or converted in-
Amortization Deducted may be able to get automatic approval from the tangible. Amortize over a new 15-year period
the part of your adjusted basis in the acquired
IRS to change your method of accounting for intangible that is more than your adjusted basis
If you later discover that you deducted an incor- amortization. For a list of automatic accounting in the exchanged or converted intangible.
rect amount for amortization for a section 197 method changes, see the Instructions for Form
intangible in any year, you may be able to make 3115. Also, see the Instructions for Form 3115 Example. You own a section 197 intangi-
a correction for that year by filing an amended for more information on getting approval, auto- ble you have amortized for 4 full years. It has a
return. See Amended Return next. If you aren't matic approval procedures, and a list of excep- remaining unamortized basis of $30,000. You
allowed to make the correction on an amended tions to the automatic approval process. exchange the asset plus $10,000 for a like-kind
return, you can change your accounting method section 197 intangible. The nonrecognition pro-
to claim the correct amortization. See Changing Disposition of Section 197 visions of like-kind exchanges apply. You amor-
Your Accounting Method, later. Intangibles tize $30,000 of the $40,000 adjusted basis of
Amended Return A section 197 intangible is treated as deprecia- the acquired intangible over the 11 years re-
maining in the original 15-year amortization pe-
other $10,000 of adjusted basis over a new
If you deducted an incorrect amount for amorti- ble property used in your trade or business. If riod for the transferred asset. You amortize the
you held the intangible for more than 1 year,
zation, you can file an amended return to cor- 15-year period. For more information, see Reg-
rect the following. any gain on its disposition, up to the amount of ulations section 1.197-2(g).
allowable amortization, is ordinary income (sec-
• A mathematical error made in any year. tion 1245 gain). If multiple section 197 intangi-
• A posting error made in any year. bles are disposed of in a single transaction or a
• An amortization deduction for a section Reforestation Costs
197 intangible for which you haven't adop- series of related transactions, treat all of the
section 197 intangibles as if they were a single
ted a method of accounting. asset for purposes of determining the amount of You can elect to deduct a limited amount of re-
When to file. If an amended return is allowed, gain that is ordinary income. Any remaining forestation costs paid or incurred during the tax
year. See Reforestation Costs in chapter 7. You
you must file it by the later of the following gain, or any loss, is a section 1231 gain or loss. can elect to amortize the qualifying costs that
dates. If you held the intangible 1 year or less, any aren't deducted currently over an 84-month pe-
• 3 years from the date you filed your original gain or loss on its disposition is an ordinary gain riod. There is no limit on the amount of your am-
return for the year in which you didn't de- or loss. For more information on ordinary or ortization deduction for reforestation costs paid
duct the correct amount. (A return filed capital gain or loss on business property, see or incurred during the tax year.
early is considered filed on the due date.) chapter 3 of Pub. 544.
• 2 years from the time you paid your tax for
that year. Nondeductible loss. You can't deduct any
loss on the disposition or worthlessness of a
section 197 intangible that you acquired in the
same transaction (or series of related transac-
Page 34 Chapter 8 Amortization