Gary Bode, CPA: we look at prior tax returns when setting up a new client, just to make sure nothing was missed. For a free phone consult, call 399-2705.
Goodwill originates from purchasing a business for more than the value of the assets. It’s a value based on expected continued customer patronage, due to its name, reputation, or any other cause.
Simple Goodwill Overview
If you buy an existing business for $1 Million, and there is only $750,000 of assets, the purchase generates $250,000 of Goodwill. There are multiple IRS wrinkles with the actual calculation, of course. The IRS allows the business to amortize the $250,000 over 15 years, not the entire $250,000 of Goodwill in the year of purchase. To deduct amortization for Goodwill, complete Part VI of Form 4562 and attach it to your company’s income tax return. List each intangible asset you’re amortizing separately; don’t aggregate them.
The only thing I brag about:
“I once found $255,000 of undeducted Goodwill for a new Chiropractic client. So, the Chiropractor could deduct a $17,000 annual tax deduction for 15 years. I found it during standard due diligence setup for a new client, which includes examining prior year returns and accounting records.”
-Gary Bode, business tax CPA and accountant
Tax Goodwill vs. Accounting Goodwill - a Paradox
- The IRS started allowing amortization (writing off an intangible asset over time) of Goodwill, through their Section 179, in 1993.
- But later, US GAAP (Generally Accepted Accounting Principals) stopped allowing Goodwill for Financial Statements.
So the normal rocket scientist would ask why?
- Accounting standards and tax codes contain contradictions and unresolved issues.
- Tax accounting differs from business accounting.
- Keeping two sets of books (tax and accounting) for a company is often required, but the public perceives it fishy (my favorite technical term!).
Depreciation vs. Amortization vs. Depletion
A single technique in three flavors
- Depreciation deducts the cost of a tangible asset over the life of its expected usefulness. As a simple example, a $100,000 machine, expected to last 10 years, yields a depreciation deduction of $10,000 per year, not the entire $100,000 in the year of purchase.
- Tax depreciation is so warped that any remaining resemblance to book depreciation is coincidental!
- Amortization deducts the cost of an intangible asset, like Goodwill, over some arbitrary time period. The IRS says 15 years. When Goodwill could still be deducted in business accounting, it was 40 years. Go figure!
- Depletion is the same beast applied to natural resources. If you put $100 million dollars into setting up a coal mine, and expect to produce 100 million tons of coal, every ton of coal you mine generates $1 of Depletion, when actually mined.
Goodwill Tax Loopholes Closed
- “Anti-churning” provisions prohibit Goodwill on business purchases from related parties.
- You can’t amortize intangible assets you create yourself.
Section 197 Intangibles Defined
Per the IRS:
- Goodwill.
- Going concern value.
- Workforce in place.
- Business books and records, operating systems, or any other information base, including lists or other information about current or prospective customers.
- A patent, copyright, formula, process, design, pattern, know-how, format, or similar item.
- A customer-based intangible.
- A supplier-based intangible.
- A license, permit, or other right granted by a governmental unit or agency (including issuances and renewals).
- A covenant not to compete entered into in connection with the acquisition of an interest in a trade or business.
- Any franchise, trademark, or trade name.
- A contract for the use of, or a term interest in, any item in this list.
We’re a business tax CPA firm in Wilmington NC, but maintain a Virtual Office to serve long distance clients. We routinely review past tax returns and accounting data with new clients, just to see if anything was overlooked. For a free phone consult call (910) 399-2705.
