CARL WATTS & ASSOCIATES

July 01, 2013



They are real, but you can’t touch them. Literally!

Intangible assets are nonphysical assets or things of value that may represent a major portion of a business’ total assets.

In 2013 the United States Patent & Trademark Office claimed that the worth of intellectual property to the U.S. economy alone is more than US$5 trillion and creates employment for an estimated 18 million American people.


Although the topic of intangibles (which include intellectual property) and their valuation in business and accounting may prove to be very interesting, the purpose of this newsletter pertains mainly to the tax interpretation and treatment of these assets.

According to the IRS, intangible property is property that has value but cannot be seen or touched.


The IRS designates certain assets as intangible assets under Section 197 of the Internal Revenue Code. These intangibles must usually be amortized (spread out) over 15 years.


For purposes of Section 197, intangible assets include:


  1. Goodwill (the value of a trade or business based on expected continued customer patronage due to its name, reputation, or any other factor.)

  2. Going concern value.(When a company is sold intact with the intent to keep it running but with new ownership, the value of the company is called going-concern value and includes the liquidation value as well the company's intangible assets.)

  3. Workforce in place (includes the composition of a workforce-- its experience, education, or training--as well as the terms and conditions of employment, whether contractual or otherwise, and any other value placed on employees or any of their attributes.)
  4. Business books and records, operating systems, or any other information base, including lists or other information concerning current or prospective customers. This includes the intangible value of technical manuals, training manuals or programs, data files, and accounting or inventory control systems. It also includes the cost of customer lists, subscription lists, insurance expirations, patient or client files, and lists of newspaper, magazine, radio, and television advertisers.

  5. A patent, copyright, formula, process, design, pattern, know-how, format, or similar item (this includes package design, computer software, and any interest in a film, sound recording, videotape, book, or other similar property).

  6. A customer-based intangible, which is the composition of market, market share, and any other value resulting from the future provision of goods or services because of relationships with customers in the ordinary course of business (e.g. newspaper subscription lists).

  7. A supplier-based intangible, which is the value resulting from the future acquisitions, (through contract or other relationships with suppliers in the ordinary course of business) of goods or services that you will sell or use.

  8. Any item similar to items (3) through (7).

  9. A license, permit, or other right granted by a governmental unit or agency. This may refer for instance to the capitalized costs of acquiring (including issuing or renewing) a liquor license, a taxicab medallion or license, or a television or radio broadcasting license.

  10. A covenant not to compete entered into in connection with the acquisition of an interest in a trade or business. An interest in a trade or business includes an interest in a partnership or a corporation engaged in a trade or business.

  11. Any franchise, trademark, or trade name.

  12. A contract for the use of, or a term interest in, any item in this list.


Certain intangible assets are NOT considered to be Section 197 intangibles, and thus may not be amortized over 15 years:


  1. Copyrights and patents, interests in films, sound recordings, video tapes, books, or other similar property. Exception: If any of these intangibles are acquired as part of a business purchase, they may be considered Section 197 intangibles.
  2. Interests in a corporation, partnership, trust, or estate; in land; or in certain financial contracts.
  3. Sports franchises.
  4. Some computer software.
  5. Some corporate transaction costs.
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Intangible Assets
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Here is another kind of classification for intangible assets:

  • Marketing-Related Intangibles: trademarks, trade names, service marks, Internet domain names, and non-competition agreements.

  • Customer-Related Intangibles: customer lists, order backlog, customer contracts/relationships.

  • Artistic-Related Intangibles:
    literary or artistic works.

  • Contract-Based Intangibles: licensing, royalty, advertising, and service agreements, as well as lease agreements, franchise agreements, use rights, employment contracts.

  • Technology-Based Intangibles: patents, software, un-patented technology, data bases, trade secrets.

Intangible assets may be also classified as unidentifiable and identifiable assets.  An unidentifiable intangible is one that cannot exist independent of the business as a whole.  Goodwill and organization costs are unidentifiable intangible assets. 


Identifiable intangibles have a separate identity and existence of their own independent of the business as a whole.  Patents, copyrights, and medical patient charts are examples of identifiable intangible assets.  If acquired by purchase, the intangible item is recognized as an asset.  If developed by the enterprise, the research and development costs are expenses when incurred.

Intangible assets do not depreciate like ordinary assets, nevertheless, you can deduct the expenses for creating the intangible asset. This includes research and development costs, legal fees and licensing fees for creating copyrights, patents, trademarks and computer software.

Intangible assets are usually shown on a company's balance sheet under non-current assets, falling after fixed assets and before or among other assets. Generally they are recorded at their historical cost, and amortized as expenses over their useful lives. The period of amortization, however, cannot exceed 40 years under the current rules of the Financial Accounting Standards Board.


The balance sheet lists such assets only if a company incurs a cost when acquiring them. Hence, non-physical assets acquired without a cost are not included in a company balance sheet. Moreover, not all assets lacking substance are classified as intangible assets.
Money owed a company or an account receivable, for instance, is considered a current account, even though it has no substance.

While the IRS doesn't tax intangible assets, it does tax income from them. Trademarks and copyrights, along with patents, can produce income for your small business, which is taxed by the IRS like any other income. On your financial accounting, you may assign a monetary value to intangibles, but in your tax accounting, you only count the income, not the value of the asset itself.


If your business sells an intangible asset, you must pay tax on the sale as regular income. (Only song catalogs can be sold and taxed at the capital gains rate. )


You have to determine your cost basis for intangibles, which, according to the IRS, may include fees for attorneys and licenses (for copyrights and patents, for instance). Neither the inventor's time nor the author's time can be counted as part of the cost basis.


For research and development, if you deduct associated costs as current business expenses, you may not count them as part of the cost basis. You pay tax on any income from the sale of an intangible above the cost basis.


Most states do not tax intangible assets as property. However, each state has exceptions. For example, Kentucky does not tax copyrights and patents, but does tax research libraries. Delaware and Nevada do not tax intangibles, but Oklahoma, New Jersey and West Virginia have collected taxes on companies that claim they are incorporated in Nevada and Delaware while operating in other states. This tax includes property tax on intangibles.

Rules and regulations on intangible assets amortization and cost deduction are complicated and complex. As always, professionals help is your best choice in all your tax dealings.