• About
    • Our Team
    • International
    • Life @ Botwinick
  • Services
    • Accounting
    • Assurance & Attestation
    • Business Consulting and Advisory
    • Contract Compliance
    • Forensic Accounting
    • Tax Compliance & Planning
  • Industries
    • Contractors
    • Dental Practices
    • Distribution, Logistics & Warehousing
    • Manufacturing
    • Medical
    • Professional Services
    • Real Estate
    • Retail
    • Sports & Entertainment
    • Technology
  • Careers
  • Insights
  • Client Access
  • Contact
  • Client Login
  • Pay Online
  • Visit Our Office
  • LinkedIn
  • Facebook
  • Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
    (201) 909-0090
Botwinick-Logo
  • About
    • Firm Overview
    • Our Team
    • International
    • Life @ Botwinick
  • Services
    • Accounting
    • Assurance & Attestation
    • Business Consulting and Advisory
    • Contract Compliance
    • Forensic Accounting
    • Tax Compliance & Planning
  • Industries
    • Contractors
    • Dental Practices
    • Distribution, Logistics & Warehousing
    • Manufacturing
    • Medical
    • Professional Services
    • Real Estate
    • Retail
    • Sports & Entertainment
    • Technology
  • Careers
  • Insights
  • Client Access
  • Contact
  • Show Search
Hide Search

Insights

Intangible Assets: How Must The Costs Incurred Be Capitalized

Alex 11/30/2022

These days, most businesses have some intangible assets. The tax treatment of these assets can be complex.

What makes intangibles so complicated?

IRS regulations require the capitalization of costs to:

  • Acquire or create an intangible asset,
  • Create or enhance a separate, distinct intangible asset,
  • Create or enhance a “future benefit” identified in IRS guidance as capitalizable, or
  • “Facilitate” the acquisition or creation of an intangible asset.

Capitalized costs can’t be deducted in the year paid or incurred. If they’re deductible at all, they must be ratably deducted over the life of the asset (or, for some assets, over periods specified by the tax code or under regulations). However, capitalization generally isn't required for costs not exceeding $5,000 and for amounts paid to create or facilitate the creation of any right or benefit that doesn’t extend beyond the earlier of 1) 12 months after the first date on which the taxpayer realizes the right or benefit or 2) the end of the tax year following the tax year in which the payment is made.

What’s an intangible?

The term “intangibles” covers many items. It may not always be simple to determine whether an intangible asset or benefit has been acquired or created. Intangibles include debt instruments, prepaid expenses, non-functional currencies, financial derivatives (including, but not limited to options, forward or futures contracts, and foreign currency contracts), leases, licenses, memberships, patents, copyrights, franchises, trademarks, trade names, goodwill, annuity contracts, insurance contracts, endowment contracts, customer lists, ownership interests in any business entity (for example, corporations, partnerships, LLCs, trusts, and estates) and other rights, assets, instruments and agreements.

Here are just a few examples of expenses to acquire or create intangibles that are subject to the capitalization rules:

  • Amounts paid to obtain, renew, renegotiate or upgrade a business or professional license;
  • Amounts paid to modify certain contract rights (such as a lease agreement);
  • Amounts paid to defend or perfect title to intangible property (such as a patent); and
  • Amounts paid to terminate certain agreements, including, but not limited to, leases of the taxpayer’s tangible property, exclusive licenses to acquire or use the taxpayer’s property, and certain non-competition agreements.

The IRS regulations generally characterize an amount as paid to “facilitate” the acquisition or creation of an intangible if it is paid in the process of investigating or pursuing a transaction. The facilitation rules can affect any type of business, and many ordinary business transactions. Examples of costs that facilitate acquisition or creation of an intangible include payments to:

  • Outside counsel to draft and negotiate a lease agreement;
  • Attorneys, accountants and appraisers to establish the value of a corporation's stock in a buyout of a minority shareholder;
  • Outside consultants to investigate competitors in preparing a contract bid; and
  • Outside counsel for preparation and filing of trademark, copyright and license applications.

Are there any exceptions?

Like most tax rules, these capitalization rules have exceptions. There are also certain elections taxpayers can make to capitalize items that aren’t ordinarily required to be capitalized. The above examples aren’t all-inclusive, and given the length and complexity of the regulations, any transaction involving intangibles and related costs should be analyzed to determine the tax implications.

Need help or have questions?

Contact us to discuss the capitalization rules to see if any costs you’ve paid or incurred must be capitalized or whether your business has entered into transactions that may trigger these rules. You can also contact us if you have any questions.

© 2022

Accounting, Tax Compliance & Planning capitalized costs, intangible assets

Reader Interactions

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Primary Sidebar

Many Tax Limits Affecting Businesses Have Increased For 2023

02/06/2023 . Tax Compliance & Planning, Business Consulting and Advisory

An array of tax-related limits that affect businesses are indexed annually, and due to high inflation, many have increased more than usual for 2023. Here are some that may be important to you and your business. Social Security tax The amount of …

Read More about Many Tax Limits Affecting Businesses Have Increased For 2023

Forms W-2 And 1099-NEC Are Due To Be Filed Soon

01/24/2023 . Accounting, Business Consulting and Advisory, Tax Compliance & Planning

With the 2023 filing season deadline drawing near, be aware that the deadline for businesses to file information returns for hired workers is even closer. By January 31, 2023, employers must file these forms: Form W-2, Wage and Tax Statement. W-2 …

Read More about Forms W-2 And 1099-NEC Are Due To Be Filed Soon

Dental Practice Acquisition – Financial Due Dilligence

01/16/2023 . Business Consulting and Advisory

Are You Ready To Buy A Dental Practice? You’ve taken the time to refine your clinical skills since dental school graduation.  You’ve registered with the top regional dental practice brokers. You’ve asked for help from anyone who might be able to …

Read More about Dental Practice Acquisition – Financial Due Dilligence

Subscribe to our Newsletter

This field is for validation purposes and should be left unchanged.
Botwinick-Logo

Quick Links

  • Home
  • About
  • Services
  • Industries
  • Careers
  • Insights
  • Contact

Contact Us

201 West Passaic Street
Suite 200
Rochelle Park, NJ 07662
info@botwinick.com
(201) 909-0090
(201) 909-8533

Follow Us

Visit Us

Footer-Map
© 2022 Botwinick & Company, LLC. All Rights Reserved. | Privacy Policy | Terms & Conditions
Website Design & Development by SHJ