What Is an Amortization Deduction?

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What Is an Amortization Deduction?

Amortization is a way of deducting specific capital costs over a certain period of time, and applies to intangible property such as goodwill, inasmuch that it results in the excess of the purchase price of a business over the value of its net assets. Goodwill refers to the reputation of a business, and is considered to be an asset.

The concept of amortization bears some similarities to that of depreciation, which is a means by which you can recover the cost or basis of a tangible asset over the useful life of the asset. Another comparable concept is that of depletion, which permits an owner to account for the decrease of a product’s reserves. Depletion is used most frequently in such industries as mining, timber, and petroleum.

Property Held for Use in a Trade or Business

Under tax law, amortization is explained in 26 U.S.C. §§197(c)(1) and 197(d), and applies to property that is held for use in a trade or business, or for property intended to produce income. According to §197, the majority of intangible assets must be amortized over a period of 15 years, or 180 months.

If you paid or incurred business start-up or organizational costs after September 8, 2008, you are allowed to deduct a certain amount of those costs. The costs that are not deducted can be amortized over a period of 180 months. Specifically, you can amortize the following business start-up costs:

Start-up costs consist of amounts paid or incurred in relation to an activity with a profit motive, and regarding the production of income in expectation of a change in the activity to an active trade or business. However, the expenses you incur in trying to buy a certain business are considered to be capital expenses that you are not allowed to amortize.

Amortizable Start-up Costs

Start-up costs are amortizable provided that they comply with the following requirements:

Qualifying start-up costs include the following:

The following expenses are excluded from start-up costs:

Disposing of Your Business

If you dispose of your business prior to the conclusion of the amortization period, you are allowed to deduct any deferred start-up costs that are outstanding. Nevertheless, you are permitted to deduct such deferred start-up costs only to the degree to which they are eligible to be a loss from your business.

Amortizable Organizational Costs

The direct costs incurred in forming a corporation are considered to be amortizable organizational costs. In order to be eligible to be an organizational cost, it is required to be:

A corporation that utilizes the cash method of accounting is permitted to amortize costs that arise in the initial tax year, even if those expenses remain unpaid in that year.

Some organizational costs that can be amortized are:

Among the organizational costs that cannot be amortized are:

Deciding to Amortize

In order to make the election to amortize your start-up or organizational costs, you are required to complete and attach to your tax return Form 4562 for the initial tax year in which your company is an active business. In addition, you may have to attach a statement to your return.

Should I Consult an Attorney?

If you are starting a business and have concerns about electing to amortize your start-up or organizational costs, you should consult a tax attorney. A tax lawyer can help you determine exactly which costs you can amortize and can assist you with any legal issues that arise in connection to amortizing certain costs.

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Last Modified: 06-02-2015 05:07 PM PDT

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