Amortization: Understanding Deductions for Intangible Assets
Amortization is a tax deduction method used to recover the cost of certain intangible assets over time. Unlike depreciation, which applies to tangible assets, amortization is specifically for intangible assets such as goodwill, patents, trademarks, and franchises. This deduction allows taxpayers to spread the cost of these assets over their useful life, typically 15 years or 84 months, depending on the asset type and applicable tax code section.
When to Use Amortization
- Section 174 Expenditures: Research and experimental expenditures incurred after December 31, 2021, and before January 1, 2025, may be amortized over 15 years. Taxpayers may elect to amortize the full remaining unamortized amount in the first tax year beginning after December 31, 2024, or amortize it ratably over a 2-year period.
- Section 197 Intangibles: Assets such as goodwill, patents, copyrights, and franchises acquired after August 10, 1993, must be amortized over 15 years. No other depreciation or amortization is allowed for these assets.
- Section 59(e) Expenditures: Certain expenditures related to partnerships or S corporations may be amortized under section 59(e), with the deduction reported on Schedule E (Form 1040), line 28.
Reporting Amortization on Tax Forms
Amortization deductions are reported on Form 4562, Depreciation and Amortization. Taxpayers must attach a statement detailing:
- Description of costs
- Date amortization began
- Amortizable amount
- Applicable Code section
- Amortization method used
For amortization that begins in 2025, taxpayers must complete and attach Form 4562. Additionally, Form 4562 is used to claim section 179 deductions, report listed property, and claim depreciation on assets placed in service in 2025.
Special Rules and Considerations
- Real property construction period interest and taxes generally cannot be amortized.
- Special rules apply for allocating interest to real or personal property produced in a trade or business.
- Taxpayers may elect to amortize remaining costs over 84 months for certain intangibles.
Note: Always verify details with the most current IRS forms and instructions. Amortization rules may vary based on the type of asset and tax year.
Source:
Form 4562 - Depreciation and Amortization
Disclaimer: Always verify with Federal or State Department of Revenue Forms and Instructions for the most accurate and up-to-date tax guidance.