Your assets may be tangible, such as real estate, business equipment and vehicles, or they may be intangible, such as patents, copyrights, licenses, construction permits, trademarks and goodwill. Your ability to decrease your intangible assets may depend on whether you created the intangible assets or acquired the assets through purchase. The method you use to decrease your intangible assets depends on whether the Internal Revenue Service recognizes the intangible asset as having a limited life or an indefinite life.
Section 197 Intangibles
You must determine your intangible asset's useful life before you can accurately depreciate it on your federal income tax return. The Internal Revenue Service classifies certain intangible assets as Section 197 Intangibles. You must amortize the value of Section 197 Intangibles, which include such items as non-compete covenants, the value of an in-place workforce, customer goodwill, copyrights, patents, know-how, permits, licenses, trademarks, trade names and other similar intangible assets, over a period of 180 months.
Non-Section 197 Intangibles
You may be able to depreciate certain intangible assets that are not classified by the Internal Revenue Service as as Section 197 Intangibles. These assets may include certain types of computer software, provided it can be readily purchase by the general public, has not been modified and operates under a non-exclusive license. An interest in an intellectual property such as a book or film is typically not classified as a Section 197 Intangible. You can depreciate the value of a non-Section 197 Intangible based on its useful life as specified by current tax law, according to the Internal Revenue Service.
You must amortize Section 197 Intangibles. You cannot depreciate them. You may depreciate certain Non-Section 197 Intangibles using the straight line method. The straight line depreciation method allows you to deduct the same amount each year for the useful life of the intangible asset. You can determine the amount of your annual depreciation by subtracting the salvage value of the intangible asset from its adjusted cost basis and dividing the remainder by the number of years of the intangible asset's useful life.
Section 197 Deductions
Some intangible assets, including off-the-shelf computer software, may qualify for a 100 percent deduction in the year you purchased them under the Section 197 rules. Your Section 197 deductions are limited to $250,000 per year, and the intangible property must be used at least 50 percent for business purposes.
- Simple Studies: What are Intangible Assets?
- Columbia University: Recognition of Non-Amortizable Intangible Assets in Business Combinations
- Internal Revenue Service: Intangibles
- Internal Revenue Service: Publication 535, Business Expenses
- Internal Revenue Service: Publication 946, How to Depreciate Property
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