Yes. Intangible assets, like computer software, patents, leases, and license agreements, benefit a company’s ability to generate revenue. The costs of maintaining these assets can be expensed as a cost of doing business. The costs to acquire these assets are spread equally over the life cycle as a non-cash, below-the-line tax deduction.
The accounting term used to account for the depreciating value of an intangible asset over time is amortization.
The tax professionals at Anderson Bradshaw have handled hundreds of cases in which business owners did not take full advantage of owning intangible assets. This article focuses on the importance of this non-cash deduction to reduce taxable income and tax liability.
Depreciation and Amortization
Amortization and depreciation are the two methods used to calculate the value of assets over time. Depreciation is used for fixed assets, while amortization is used for intangible assets—meaning assets without physical attributes.
The calculation of the value of these assets has different components and is presented on a balance sheet separate from an operating statement.
Amortization
Assets do not need physical attributes to have value. Non-physical assets have no value for resale or salvage. However, they have value during their life cycle, and the calculation of this value throughout their use is the intent of amortization.
Amortizing the carrying value of an intangible asset is a different context than amortizing a principal balance due on a loan.
Calculation Method
The straight-line method is used to amortize intangible assets. This means the asset’s cost is expensed equally each year through its life cycle. The depreciable base is the asset’s cost divided by the years in the life cycle. The amortized amount is constant, and the carrying value is reduced in equal increments each year.
The Intent of Amortization
Amortization distributes cost over a fixed period. Unlike depreciation, value is not considered and amortization cannot be accelerated. Therefore, a taxpayer has no decision about which calculation method to use to their advantage
Straight-line depreciation affects cash flow the same each year.
Cash Flow
Although amortizing an intangible asset does not have the flexibility of depreciating fixed assets, amortization is a non-cash expense without associated revenue. This non-cash expense should be omitted from operating statements. Instead, it is recorded on a balance sheet to accurately reflect the declining carry costs of intangible assets and recorded on a tax return to lower taxable income.
A non-cash expense on an income statement will distort the net operating income and not represent the actual basis when budgeting for capital expenditures.
Hence, why tax returns are prepared from balance sheets, not operating statements.
Amortization and depreciation are accounting guidelines for valuing certain assets. The concepts are similar: both methods reduce the asset’s carried value over time and account for the decrease in value through its use and age.
Amortization is spreading the asset’s cost over its useful life without any consideration given to resale or salvage value at the end of the life cycle.
Get In Touch with Anderson Bradshaw Tax Consulting Today
If you have experienced asset misclassification, an error in calculating depreciating value, or did not take advantage of this non-cash deduction, please contact Anderson Bradshaw Tax Consulting today.
With over 32 years of experience, we have seen every tax issue and have learned the best ways to handle any situation quickly and efficiently.
For further information or to schedule a consultation, please contact Anderson Bradshaw Tax Consultants at 877-550-3911 or visit www.AndersonBradshawTax.com to learn more.
