Tuesday, December 26, 2006


Some things are amortized and other things are depreciated. What’s the difference?
You depreciate buildings and equipment which are tangible property. You amortize intangible assets such as goodwill, licenses, patents, copyrights, etc. If you buy a bond yielding taxable interest at a premium over face value, you can elect to amortize the premium which reduces the taxable interest income.

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Bonds with taxable interest
If you elect to amortize the premium you paid for a bond yielding taxable interest, you must reduce your basis so that, if you hold it until maturity, it would be reduced to its face value. If you sell it before maturity, then your basis for gain or loss would be the your cost minus the amortized premium which reduced your taxable interest income.
Bonds yielding tax-exempt interest:
You MUST amortize the premium on tax-exempt bonds which reduces the amount of tax-exempt interest reported on line 8b, Form 1040 and also reduces your basis in the bond.
Section 197 Intangibles
The acquisition cost of purchasing goodwill and other Sec 197 assets are amortized over 180 months. You begin amortizing these intangibles the later of
the month you acquire them or
the month you begin your business.
Sec 197 assets include goodwill, records, databases, patents, copyrights, favorable credit ratings, favorable supply contracts, licenses and permits, covenant not to compete, franchises, trademarks, etc.
Software acquired in connection with the purchase of a business can be amortized over 180 months. Off-the-shelf computer software is amortized over 36 months. If the software comes with the computer and the software is not priced separately, then you depreciate it as part depreciable basis of the computer . Software with a useful life of less than one year is deducted as current expense.
Intangible Assets other than Sec 197 Intangibles:
Three-year amortization: Circulation Expenditures
60-month amortization: Research and experimental costs under code section 174
Ten-year amortization: (Sec 59e) Research and experimental costs under code section 59e, Natural deposit development costs, Mining Exploration costs.

180-month amortization: Corporate organization costs (Sec 248), Partnership organization costs(Sec 709), Business Start-up costs(sec 195).

Leasehold improvements: These were amortized over 60 months under provisions that expired Dec 31, 2005. Leasehold improvements placed in service in 2006 is depreciated based on the recovery period for the underlying property.

Business Start-up costs:
Up to $5,000 of business start-up costs can be written off as a current deduction subject to reductions if such costs exceed $ 50,000. Any part not written off as a current deduction may be either capitalized or amortized over 180 months. You must attach a statement to your tax return stating that you elect to amortize these costs under either sec. 195, 248 or 709 (see above discussion of 180-month amortization)

Link to IRS forms and publications:
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This information is not intended to be advice to the recipient. In compliance with Treasury Department Circular 230, unless stated to the contrary, any Federal Tax advice contained in this Blog was not intended or written to be used and cannot be used for the purposes of avoiding penalties.

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