Deduction of intangible assets with amortization

If you’re in business, you may have heard the word amortization. And he probably thought, “What is amortization?” You’re not alone. Many people have heard the word, but most don’t know what it is. The basic definition of amortization is the depreciation of intangible assets. But that’s a bit confusing, so let’s break this down a bit using an example.

Let’s say you buy an established restaurant for $200,000. For that amount you get the equipment, the furniture, the decoration, the dishes, the name, the clientele, the recipes and the reputation. Equipment, furniture, decorations and dishes are called tangible. They are things that you can physically touch and have a specific value. These things are depreciated on your tax return. And depreciation means you can deduct the cost of these items a little each year, usually over 3 to 7 years. You deduct a little each year instead of all the spending in a year.

But what about the rest of the things you paid for: the name, the customers, the recipes, and the reputation? These elements are intangible. They can’t be physically touched, but they are essential parts of your newly acquired business. These intangible assets are amortized, which is a special depreciation for these intangible items. But since you can’t touch or see them, how do you know the value of these items? The depreciation value of these items is the difference between the value of the depreciable items or tangible assets and the price for which you bought the business. This is usually detailed in the purchase documents. This amount will be deducted a little every year from 3 to 20 years depending on the expense.

Why is the amortization spread over such a long period of time? Well, tangible things like equipment and furniture generally need to be replaced every 3-7 years, so most businesses have ongoing deductions over the years as they are upgraded and replaced. Things that qualify for depreciation are one-time purchases, so the IRS believes it should be spread out over more years.

Additional things that need to be written off include: Software with a useful life of more than one year, start-up or setup costs greater than $10,000 (but this is reduced dollar-for-dollar when start-up and setup costs exceed $10,000). the $60,000), established labor, non-compete agreements entered into in connection with the acquisition of a trade or business, patents, copyrights, franchises, trademarks and/or trade names.

One thing that is important to note is that depreciation time periods are specific to the type of expense, so check with your tax professional to make sure you are depreciating correctly and writing off the correct expenses.

To learn more about amortization and depreciation and how the two work, and to learn more about other tax deductions you may qualify for, visit Avoid being audited.com. We have great audio resources to help you with depreciation and many other tax saving strategies.