How to Treat Intangible Assets on your 2024 Tax Returns

Intangible assets—such as patents, trademarks, copyrights, and goodwill—are critical to modern businesses. However, understanding the tax treatment of these assets can be challenging due to complex rules and regulations. To help, we’ve outlined some common questions and key points related to the tax treatment of intangible assets.

What Are Intangible Assets?

"Intangible assets" covers a wide range of items. Determining whether an acquired or created asset qualifies as an intangible can be tricky. Common examples of business-related intangible assets are:

• Patents, copyrights, trademarks, and trade names

• Goodwill

• Franchises and licenses

• Debt instruments and financial derivatives (such as options, futures, and currency contracts)

• Prepaid expenses and non-functional currencies

• Business memberships and customer lists

• Ownership interests in business entities (e.g., corporations, partnerships, LLCs, trusts, and estates)

• Annuity, insurance, and endowment contracts

What Are the Typical Expenses?

Businesses often incur various expenses when acquiring or creating intangible assets. Many of these costs must be capitalized under IRS regulations. Some examples of capitalizable expenses include amounts paid to:

• Obtain, renew, renegotiate, or upgrade business licenses

• Modify contract rights (e.g., lease agreements)

• Defend or secure ownership of intangible property, such as patents

• Terminate agreements, such as leases or non-compete contracts

The IRS generally treats an expense as a "facilitation cost" if it’s paid in the process of investigating or pursuing a transaction to acquire or create an intangible. Facilitation costs include payments to:

• Attorneys for drafting and negotiating lease agreements

• Accountants, attorneys, and appraisers to determine the value of stock in a buyout

• Consultants to analyze competitors in preparation for contract bids

• Legal counsel for preparing and filing trademark or copyright applications

Why Are Intangibles So Complex?

IRS regulations require businesses to capitalize costs incurred to:

• Acquire or create an intangible asset

• Create or enhance a distinct intangible asset

• Create or enhance a "future benefit" identified by IRS guidance

• Facilitate the acquisition or creation of an intangible asset

Capitalized costs cannot be deducted in the year they are paid or incurred. Instead, they must be deducted over the asset's useful life—or in some cases, according to specific periods prescribed by tax regulations. However, exceptions exist for certain costs, such as:

• Expenses under $5,000

• Payments for rights or benefits that do not extend beyond the earlier of:

  • 12 months after the first date the taxpayer realizes the right or benefit, or

  • The end of the tax year following the year in which the payment is made

Are There Any Exceptions?

Yes, like many tax rules, there are exceptions to the capitalization requirements. In some cases, businesses can make elections to capitalize items that would not typically be capitalized. The rules are extensive and complex, so each transaction involving intangible assets should be carefully analyzed to determine the correct tax treatment.

Need Assistance?

Managing the tax treatment of intangible assets is essential to maximizing tax benefits and ensuring compliance. If you need help navigating the capitalization rules or determining whether certain costs must be capitalized, reach out to us. We can help you analyze your transactions and clarify your tax obligations. Schedule an appointment today to get started!