CPA Tax Accountant discusses Goodwill Amortization | IRS Form 4562 Depreciation and Amortization | Amortization Schedule | IRS Publication 535

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. Tax reporting for Goodwill amortization means you’re deducting the Goodwill over time on your business tax returns e.g. Form 1120 for C Corporations, Form 1120-S for S Corporations, Form 1065 for Partnerships, Schedule C, Schedule E etc. Like depreciation, goodwill amortization flows through IRS tax Form 4562 and then into the parent tax return. I don’t think the Form 4562 instructions are helpful and most Folks let the tax software handle that. Publication 535, Business Expenses, chapter 8 might help. CPA tax accountants setup Amortization Schedules to track the Goodwill annual deduction.

Confusing terminology with Amortization

• The term amortization schedule or amortization table commonly refers to a loan’s payoff schedule that show the principal and interest paid with each payment.
• But here I’m discussing amortization, a process where you deduct the value of an intangible asset, like Goodwill, over time and across multiple business tax returns.

Simple Goodwill Overview:

• If you buy an existing business for $1 Million, with only $750,000 of tangible assets, the purchase generates $250,000 of Goodwill.
  • There are multiple IRS wrinkles with the actual calculation, of course.
• For tax purposes, Goodwill amortization usually uses a straight line write off; an equal amount every year until the Goodwill value is $0.
  • In our example, the IRS allows the business to amortize Goodwill over 15 years, not the entire $250,000 of Goodwill in the year of purchase.
  • So, the Goodwill deduction is $16,667 each year, for 15 years.
  • First and last year use a partial deduction based on the date you bought the business.
•  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 un-deducted 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, CPA 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 your CPA accountant keeps a separate set of book for Financial Statements and tax reporting.

Depreciation vs. Amortization vs. Depletion:

A single technique in three flavors

• Depreciationdeducts 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 tax 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! The IRS has complex depreciation rules. Many allow accelerated depreciation. Section 179 allows a business to expense large amounts of otherwise depreciable assets. The rules change every year.
• Amortizationdeducts 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!
  • On rental real estate tax returns, loan re-financing fees are amortized.
  • On business returns, start-up costs can be itemized.
• 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 expense.

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.

I’m a nationwide CPA accountant with a virtual office. (910) 840-3858.

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